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By Ximena Escobar de Nogales, Deputy Director, Centre for Applied Studies in International Negotiations (CASIN)
UN Secretary-General Kofi Annan and Stanley Fischer, Governor, Bank of Israel
"Microfinance is not charity. In some cases, it might have started out as philanthropy. But today it is a real business." With these words, UN Secretary-General Kofi Annan opened the two-day Geneva Private Capital Symposium. Held from October 10-11, 2005, this symposium conducted a rigorous treatment of the business case for private capital in microfinance from the point of view of financial and banking experts. With over sixty speakers, the meeting attracted more than 250 participants. They came from the finance sector, including Credit Suisse, Citigroup, ABN AMRO, Moody's, UBS, and private investors; foundations, such as the Omidyar network, the Soros Foundation, and the Michael and Susan Dell Foundation; international organisations such as the World Bank, the United Nations Conference on Trade and Development (UNCTAD), the International Labour Organisation (ILO), the United Nations Capital Development Fund (UNCDF), and the International Committee of the Red Cross; academia, including the Institute for Management Development, Lausanne, Switzerland (IMD); government; and the media. All participants had one common interest: to explore microfinance as a commercial investment opportunity. The symposium presented testimonies of private investors who are already supplying liquidity.
Affirming the Business Case for Commercial Investment in Microfinance
The Symposium familiarised investment professionals with microfinance and presented compelling evidence for including microfinance vehicles in financial strategies. It was structured along four main plenary sessions focusing on the supply and demand for private capital in microfinance, the business models in existence, the role of public actors in microfinance, and the critical factors for private investment. The symposium presented a paper on each of these subjects; a book of edited proceedings will be produced by the IMD and distributed to all registered participants in the spring of 2006.
In addition to the plenary round tables, the Symposium included 12 high-level, interactive working sessions for participants to deepen their knowledge of specific aspects of microfinance such as securitisation, rating microfinance debt and equity, leveraged finance, and risk management, among others.
In his opening remarks, Ivan Pictet, President of the Geneva Financial Center and Partner of the 200 year old Geneva-based private bank, Pictet & Cie, stated: "We feel rather convinced that this industry is a growth industry, ready to take investments". Pictet went on to describe the attractiveness of the microfinance industry: although hard to evaluate, it has manageable risks, low volatility and high demand. Microfinance helps poor people, he said: as they get more ownership, they are more likely to succeed and make their country prosper. Despite this appeal, investors still demand more transparency and liquidity from microfinance investments. The objective of the conference he stated was to help various financial intermediaries get rid of ideas commonly associated with microfinance such as "loss of control", "improved form of charity", "not fully fledged asset class" and other misconceptions.
Highlights of the event included the panel "Hard Talk: What Does Private Banking Have to Do with Microfinance?" which included Elizabeth Littlefield, CEO, the Consultative Group to Assist the Poor (CGAP) and Michael Hoelz, Global Head of Sustainable Development, Deutsche Bank, and was superbly moderated by Tom Easton, New York Bureau Chief of The Economist. "Leading MFIs are more profitable than commercial banks…and younger MFIs are getting profitable faster than older ones did", said Littlefield.
Also thought-provoking was Easton's interview with Stanley Fischer, Governor of the Bank of Israel, on microfinance as a changing industry. "I had to be educated about microfinance in the last decade. I became convinced about it when I saw in the field the human impact a $100 loan can have. Today there is increasing evidence that economic growth is correlated to the level of access people have to financial institutions. I believe conference participants have two reasons to be here: they have an interest in microfinance and they believe microfinance investments make a social and economical contribution" said Fischer. Asked by Easton if there will be a substantial microfinance business to attract bankers to similar symposiums in five to ten years, Fischer responded: "There are high rates of return to be made by investing in microfinance. Competition is therefore likely to pick up. If we manage to collect more information, increase the capacity of the industry, see microfinance institutions (MFIs) evolve into lending enterprises, then it is likely that bankers will come in the future to such symposiums. But let's not exaggerate: the growth of microfinance will stay in the single digits and microfinance will never represent more than 20% of global value of assets."
Leading experts in microfinance stated repeatedly that this industry is a fast growing, emerging industry with low volatility, and a return on investment better than comparable banking investment and where the demand for capital is large. Different estimates of the size of the demand were heard during the symposium, but it could be as high as US$30 billion if all lending to micro and small and medium enterprises (SMEs) is included, according to the IMD.
Kathryn Imboden, Senior Policy Advisor, United Nations Capital Development Fund, presented a paper on the critical factors for private investment in microfinance. She said: "What may have initially looked like an act of philanthropy on the part of international investors is becoming significant mainstream investment in microfinance. While the major challenge today is addressing the foreign exchange risk issue, these funds provide resources to institutions in countries where the domestic financial markets are not yet deep and broad enough. They instil financial discipline on the part of borrowers, and they can provide protection from political interference". She also shared the main findings of the Blue Book project, a comprehensive analysis based on regional surveys of the major difficulties to extending financial services to poor people.
Asked whether this is a new asset class, the Head of Private Banking at Credit Suisse, Arthur Vayloyan, responded that microfinance includes many different investment products such as funds, securitisation, and bonds. "It is therefore more an investment theme, like biotech, than an asset class", he affirmed.
Michael Hoelz said that Deutsche Bank had had a successful experience with investment in microfinance through local banking partners. Deutsche Bank is aiming to set up a consortium in November that will invest 70 million dollars in microfinance. "Microfinance is increasingly regarded as a commercially viable business opportunity", he asserted.
Particularly stimulating was the passionate statement of private investor Alexandre de Lesseps Director of BlueOrchard Finance, the first commercially financed group to invest in microfinance. De Lesseps affirmed microfinance is the best tool to create inclusive capitalism.
MFIs in Search of the Best Business Model
An interesting contribution came from the IMD. Using a sample of eight microfinance institutions, IMD conducted a study characterizing models along four dimensions: operating model, strategy/structure, funding sources and the revenue model. From the analysis, three main business models have emerged: (i) the tight network, which has usually grown out of NGO roots; (ii) the public-private partnership; and (iii) the private equity/venture capital model, which tends to be very commercial. Yet in spite of the differences, MFI business models are increasingly converging, and a common feature of all the MFIs in this study was the goal to grow into full-service banks.
Is Private Money Crowding out Public Money or Vice Versa?
The public sector plays a crucial role in capacity building, business skills development, infrastructure, and distribution channels and funding where commercial lending is not possible, it was agreed. But the symposium also discussed the risk of public money crowding out private capital. A lively discussion arose on this issue, as questions focused on the efficient use of taxpayers' money. The European Bank of Reconstruction and Development (EBRD), Germany's kfW and the World Bank were criticized by some participants who argued that these institutions subsidize microfinance projects even when the MFI is capable of offering market rates. It was argued that subsidies should be used where commercial money cannot be used. But when an MFI can acquire money at market rates, it distorts the market to subsidise it. The inappropriate use of public moneys does not do the microfinance industry any good, it was agreed. Several participants emphasised that public money and public resources are better used in enhancing the absorption capacity of MFIs. In the microfinance industry's interest we need to make the best use of all resources, private and public concluded Chikako Kuno, from the EBRD.
Challenges Ahead
Mobilizing more capital and engaging institutional investors, such as pension funds, remains the major challenge. For this to happen there is a need to identify what is still missing from the investor's point of view. An area where progress must be made is in statistics and reporting. It was concluded once again that data on microfinance is not reliable. What is the size of the market? Some mention 500 million microentrepreneurs worldwide. Vijay Mahajan, CEO of BASIX, the first microfinance institution in India, and among the first in the world to attract commercial equity investments, presented a paper on the demand for private capital in microfinance where he places the estimate at 135 million microenterprises. Of this demand only 4.4% have access to credit worldwide.
Beyond better data, it was agreed that it will be fundamental to further develop the absorption capacity of microfinance institutions. Most investment has gone to a few players. More capacity needs to be built, indicated Vijay Mahajan, Elizabeth Littlefield and many others.
Geneva as a Financial Hub
The Geneva Symposium was seen as a starting point for financial Geneva's involvement in microfinance. The organisers, CASIN and the Geneva Financial Center, spearheaded the efforts, together with a broad range of international financial partners from the finance and development worlds. The Symposium aimed at making a lasting contribution from the Swiss financial community to the International Year of Microcredit 2005, said CASIN Director Jean Freymond.
At the closing session, Ivan Pictet shared his ideas about what Geneva, as a financial hub, can offer the microfinance field, which included financial expertise to eliminate barriers to microfinance investment (reporting standards, know how, knowledge, better information flows). Geneva could also offer, continued Pictet, training for bankers in microfinance investing. He concluded that more needs to be done to develop secondary markets for securitisation, risk management and currency exchange rate risk.
For more information, please visit: www.geneva-conference-microfinance.com
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