IAMFI Events

Upcoming IAMFI Events
IAMFI’s upcoming events include, among others, webinars, networking events and IAMFI Investors Circle meetings.  Event details will be provided in advance

The following calendar presents a list of events that IAMFI will be hosting or co-hosting in 2010. Please check back frequently for new events and information. Email us at info@iamfi.com if you are interested in attending any of these events.

Event Date Location Host Type of Event
IAMFI MF Lenders Working Group Meeting January 28 New York, NY IAMFI- Morgan Stanley Meeting/Teleconference
IAMFI Connect March 9 Geneva, Switzerland IAMFI- World Microfinance Forum Geneva Presentation
IAMFI Connect March 15 Oslo, Norway IAMFI- Norwegian Microfinance Initiative  Presentation
IAMFI MF Lenders Working Group Stakeholder Forum March 23 New York, NY IAMFI- Morgan Stanley- WWB Meeting
Investor Network Meeting April 26 San Francisco, CA IAMFI Meeting
IAMFI Connect May 12 Amsterdam, Netherlands IAMFI Presentation
IAMFI MF Lenders Working Group Stakeholder Forum May 12 Amsterdam, Netherlands IAMFI- Morgan Stanley Meeting
Pension Fund Managers Forum June  New York, NY IAMFI Webinar
Investor Network Meeting June  New York, NY IAMFI Meeting
Wealth Advisors Round Table July New York, NY IAMFI Meeting/Webinar

 

Third Party Events
To date, IAMFI has confirmed its participation as speaker or moderator in the following events in 2010.

IAMFI Presentations Date Location Host
Microfinance and Sustainable Development: The Investment Opportunity Harnessing Market Forces to Catalyze Poverty Alleviation & Human Development January 25-27 New York, NY The International Quality and Productivity Center, The Microfinance Club of New York, and The Wall Street Microfinance Alliance
International Transaction Clinic February 2 Ann Harbor, Michigan University of Michigan Law 
Microfinance Investment Summit-Geneva Edition March 10-11 Geneva, Switzerland C5
8th Annual WWB Microfinance and the Capital Markets Conference March 23-24 New York, NY Women's World Banking - J.P. Morgan
Omidyar Network Executive Forum April 27-29 Redwood City, CA Omidyar Network Executive Forum
Micro Financial Services World May 10-11 Amsterdam, Netherlands Hanson Wade - Unitus
Global Microfinance Investment Congress  May 17-18 New York, NY PlaNet Finance 
Take Action! Summit  October San Francisco, CA Correlation Consulting

 

IAMFI Events 2009
IAMFI’s events include, among others, webinars, networking events and IAMFI Investors Circle meetings. 

The following calendar presents a list of events that IAMFI hosted or co-hosted in 2009.

 

Event Date Location Host Type of Event
Changing Strategies for Changing Times February 24 Virtual IAMFI - Standard & Poor's Teleconference
IAMFI Connect: Debt Default Study/Networking Lunch May 5 Amsterdam, Netherlands IAMFI - DOEN Presentation/Lunch
IAMFI Connect: Debt Default Study/Networking Lunch May 6 London, UK IAMFI - Omidyar Network Presentation/Lunch
IAMFI-Intellecap Microfinance Private Equity Investment Forum May 21 New York, NY IAMFI - Intellecap Breakfast - Work Session
Microfinance Equity Valuation: Past and Present May 27 Virtual IAMFI - CGAP - J.P.Morgan Webinar
Microfinance: Testing its Resilience to the Global Financial Crisis June 9 Virtual IAMFI - Fitch Ratings Teleconference
IAMFI Connect: Bay Area Microfinance Investors Event June 17 San Francisco, CA IAMFI Meeting/Reception
IAMFI Connect: Debt Default Study/Networking Lunch July 14 Boston, MA IAMFI - Tufts Microfinance Fund Presentation/Lunch
IAMFI Investor Network Meeting September 29 New York, NY IAMFI Meeting
Take Action! Summit October 5-7 Redwood City, CA Correlation Consulting Presentation
IAMFI Microfinance Lenders Working Group Launch October 30 New York, NY IAMFI - Morgan Stanley Meeting/Teleconference
IAMFI Annual Members Meeting November 12 New York, NY IAMFI - J.P. Morgan Meeting/Teleconference
IAMFI Connect: Networking Lunch November 12 New York, NY IAMFI - J.P. Morgan Lunch
Microfinance Webinar December New York, NY IAMFI Webinar
YEAR END FORUM for Private Investors December 10 New York, NY Institute for Private Investors, Inc. Presentation

Third Party Events
To date, IAMFI has confirmed its participation as speaker or moderator in the following events in 2009.

IAMFI Presentations Date Location Host Type of Event
NYU Microfinance: Structuring Financing Class
February 9 New York, NY New York University Class
University of Chicago Graduate School of Business Alumni Meeting March 5 New York, NY University of Chicago Presentation
7th Annual WWB Microfinance and the Capital Markets Conference April 30 - May 1 New York, NY Women's World Banking and J.P.Morgan Panel
Global Microfinance Investment Congress May 18-20 New York, NY American Conference Institute and PlaNet Finance Panel
Microfinance 2.0: Cutting-Edge Silicon Valley Solutions to Thrive in the Downturn June 15-17 San Francisco, CA IQPC Panel
Microfinance for Institutional Investors September 21-22 Washington DC Hanson Wade Panel
Take Action Symposium October 5-7 Redwood City, CA Correlation Consulting Presentation
YEAR END FORUM for Private Investors December 10 New York, NY Institute for Private Investors, Inc. Presentation

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IAMFI Investor Network Meeting Event Summary

TIAA-CREF’s office, New York, on September 29, 2009, 6:00pm - 8:55pm

The goal of the IAMFI Investor Network Meeting was to create the forum in which prospective investors could hear presentations by microfinance investment vehicles (MIVs) on potential investment opportunities.  IAMFI likewise sought to offer investors a venue for networking with like-minded peers. 

Twenty-six guests Limited Partner responded and 19 attended, comprising high net worth individuals, wealth managers, venture capital firms and angel capital investors.

Scott Budde and Joan Trant made opening remarks, followed by MIV presentations:

  • Ann Miles, managing director of BlueOrchard, offering a debt investment option with monthly liquidity.
  • Michael Parker, chief executive officer and co-founder of Minlam Asset Management, accompanied by colleague Ron Dadina, presenting their local currency debt fund.
  • Christine Killorin, chief financial officer of Grassroots Capital Management, accompanied by Anna Kanze, presenting the Grassroots Microfinance Equity and Prospero Microfinanzas Funds, both 100% equity and the latter focusing on Latin America/Caribbean.
  • After each presentation, investors had the opportunity to ask questions and make comments.

 

Following the MIV presentations, Joan Trant opened up the floor for feedback.  One attendee asked about the inputs for successful microfinance investing.  Greg Casagrande of MicroDreams and SPBD Microfinance, said, “It’s all about good management, that’s the key to a successful MFI.”

Stuart Sundlun of BMB Group and Paul Colligan of Morgan Stanley Smith Barney both agreed that investors choose microfinance not for the returns but for the social impact.  Sundlun, an investor in the Dignity Fund, stated, “People can easily give their money to charities.  We’re not charity. We can offer a double or triple bottom line - you sell it to people who want a social impact.”  Colligan said, “I’m here to learn more, and to broaden my clients’ spectrum.  I’m trying to focus on people who have passion for social impact.”  Mike Fisher of GE Equity agreed by simply stating, “Social impact is fundamental.”

Following the discussion, guests stayed for socializing, food and drinks. IAMFI’s first Investor Network Meeting achieved its goals, and IAMFI will host additional IAMFI Investor Network Meetings in the future.  IAMFI also collected feedback on the three MIVs.  Significantly, seven responses showed interest in learning about one or more of the three MIVs, and four attendees indicated a possible interest in making an investment.

 

IAMFI-CGAP-J.P.Morgan Webinar - Microfinance Equity Valuation: Past and Present
Virtual, May 27, 2009

As follow-up to the IAMFI–Intellecap Microfinance Private Equity Investment Forum, IAMFI hosted a Webinar to review and discuss the findings from the recent CGAP - J.P.Morgan study, Shedding Light on Microfinance Valuation: Past and Present.  Xavier Reille, of the Consultative Group to assist the Poorest (CGAP), and Frederic de Mariz, of J.P.Morgan, presented the study’s findings and offered insights on how equity valuation is responding to the global economic crisis.

The CGAP – JPM study analyzed the feedback of its confidential survey that gathered data on 144 private equity microfinance transactions from January 2005 through September 2008.  The study compared microfinance with traditional banking, offered a technical overview of valuation methods, provided data on microfinance valuations and evaluated the performance of 10 publicly listed Low Income Finance Institutions (LIFIs), including microfinance institutions (MFIs).

Frederic began by assessing key differences between MFIs and traditional banks, highlighting the following characteristics of MFIs:

  • Double bottom line
  • High net interest margins
  • High asset quality
  • High operating costs
  • Longer term funding

The study determined that the unique business model employed by MFIs requires a different approach to valuation.

Xavier next presented valuations of private equity microfinance transactions that took place during 2005-08.  Median historical price/earnings (P/E) ratios ranged between 7.2-7.9x and historical price/book value (P/BV) between 1.3-1.7x.  Figures varied widely by region.  India was a clear outlier trading at 7x BV, due to the local regulatory environment and investment activity by large hedge funds.  Africa posed another interesting case:  despite an average -3% return on equity, the region’s MFIs traded within the industry average, at 1.5x P/BV.  The analysts hypothesized that this was due to a dearth of MFIs with strong returns and a higher percentage of socially motivated investors entering the market with significant capital.

The study determined that the two valuation drivers with statistical significance were net income growth and deal size.  Less influential drivers included 1) savings as a percentage of an MFI’s total assets, 2) leverage (debt/equity), 3) type of investor (Development Finance Institutions, or “DFIs,” generally paid higher prices than more commercial microfinance investment vehicles, or “MIVs”), 4) geography, 5) legal status (banks commanded higher valuations compared to non-regulated financial institutions and nonprofits), 6) asset quality (measured using portfolio at risk over 30 days, or “PAR30”) and 7) efficiency (operating expenses/average loan book). 

Interestingly, the data demonstrated no link between profitability and valuation.  The study’s analysts ascribed this to the immaturity of the microfinance private equity market and the lack of consensus on MFI valuation.  The study’s authors projected that, on average, valuations would decrease in 2009. 

Frederic introduced the LIFI index, a market capitalization-weighted index of six listed institutions that provide consumer and microenterprise loans, payments and insurance to low-income populations, but that do not necessarily seek a double bottom line.  The six institutions in the LIFI index are: African Bank, Danamon, IPF, Banco Compartamos, Financiera Independencia and BRI (BRI received a one-third weighting of its market capitalization given that about 33% of its loans may qualify as microfinance).

The LIFI index trades at a premium on a P/BV basis compared to traditional banks.  From 2003 through May 12, 2009, the LIFI index stood at 472 vs. 65 for traditional banks.  This premium has declined considerably since the sector’s peak in November 2007.  From September 2008 to May 12, 2009, the LIFI index was 104 vs. 66 for traditional banks.  The LIFI index offers interesting comparables to microfinance equity valuation since they operate in the same market.

Regarding the impact of the credit crisis on MFIs, Xavier highlighted the following pressures:

  • Funding costs have increased from 300 to 500 basis points, and as high as 700 bps in extreme cases
  • Asset quality as measured by PAR30 has deteriorated: 67% of MFIs surveyed indicate an increase in PAR30, although the top 50 MFIs are still below the 5% level considered best practice
  • MFIs face potential earnings and capital losses due to dollar strength and the currency mismatch created by hard currency loans; some losses are as high as 70%
  • Decreases in remittances will likely affect deposits and clients’ income

Thirty attendees representing every aspect of the microfinance industry participated in the Webinar and engaged in a Question & Answer session following the presentation, which is summarized below:

Why haven’t microfinance equity valuations dropped as much as the study projected?

Expectations in December 2008 for the banking sector and for emerging markets were quite gloomy.  MFIs have not been as impacted as much as mainstream banks by the crisis, and analysts now expect a quicker bounce back for emerging market investments.  However, Eastern Europe and Central Asia still pose concerns for microfinance investors.

How has commodity price volatility affected microfinance?

Food prices continue to be of concern to MFIs and their clients; despite decreases prices are 35% higher than early 2008.

Is there increasing concern regarding regulatory risk?

Regulatory risk (i.e. legislation imposing interest rate caps) does not appear to be increasing.

What are the expectations for PAR30?

As indicated, PAR30 is a concern given that 67% of MFIs say their clients are having difficulty repaying loans, combined with the drop in remittance flows.

Describe any secondary market transactions and resulting internal rates of return (IRR).

Whereas a primary transaction raises money for the company, a secondary transaction raises money for existing shareholders, allowing them to exit.  The most well known secondary transaction was Compartamos in Mexico, raising about US$450mn in a 100% secondary and historic transaction.  The proceeds of the operation went to shareholders. Not having the exact IRR available, Frederic affirmed that it was very high.

For LIFI Index, you exclude some banks due to lack of financial forecasts. Why are the forecasts crucial for inclusion in the Index, and do you anticipate being able to include more publicly listed MFIs such as Equity Bank, in order for the index to be more representative?

Finding more benchmarks is the key purpose of the report.  Therefore the study authors spent a lot of time on the list of LIFIs, discussing this with colleagues in other emerging markets.  The LIFIs had to meet the following requirements: 1) institutions have to target low-income segments, even if they are not offering exclusively working capital loans to microentrepreneurs; 2) data had to be readily available (ideally, on Bloomberg); and 3) the market capitalization and the daily liquidity of the company/stock had to exceed a threshold, because below that, some stocks can have days with no trading, and the stock price is subject to high volatility.  If such a stock is up by a high percentage but with no volume, that price may not be very accurate.

For P/BV multiples, forecasts don't really matter, as the book value perspective is more concerned about today's value.  However, for P/E multiples, forecasts do matter.  It’s more representative to evaluate both types of multiples and not only P/BV for high growth companies, so we narrowed the list to six LIFIs meeting the key requirements.

What is the correlation between P/B valuation and long term expected growth rates?

The correlation between P/BV and earnings growth is indirect.  If earnings grow in the future, it is safe to assume that book value will grow as well (possibly less than earnings due to dividends and write offs).  Book value growth is directly related to P/BV.  If the denominator grows, the numerator (price) has to grow at least at the same pace, for the multiple to be stable.

IAMFI is grateful to Frederic and Xavier for sharing the key findings of the microfinance equity valuation study.  Participants offered the following comments:

“Thanks so much for the webinar this morning and the breakfast meeting last week.  They were both very informative and productive.”  - Howard Finkelstein, Law Offices of Howard J. Finkelstein

“Very nice job on the webinar!”  - Greg Casagrande, SPBD

“Many thanks for the webinar! Very interesting.”  - David Gough, Grassroots Capital Management


For more information, please view the CGAP – JPM Webinar slide presentation.  You may also view the full study, Microfinance - Shedding Light on Microfinance Equity Valuation: Past and Present.  For questions on specific details not covered in the webinar, you may contact Frederic de Mariz of J.P.Morgan (frederic.de.mariz@jpmorgan.com; tel. +55 11 3048 3398), and Xavier Reille of CGAP (xreille@worldbank.org; tel. +33 1 4069 3032).

For additional information on microfinance private equity investment, please read the event summary on the IAMFI – Intellecap Microfinance Private Equity Investment Forum, on May 21, 2009, and the related article, Microfinance Private Equity: Taking the Pulse of an Emerging Investment, co-written by Lindsay Clinton of Intellecap and Joan Trant of IAMFI, which summarizes the survey findings.

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IAMFI-Intellecap Microfinance Private Equity Investment Forum
New York, May 21, 2009

In May 2009 the International Association of Microfinance Investors (IAMFI) and Intellecap joined forces to assess current investor views on microfinance private equity investment.  Their goals were to understand the risk and return perceptions of microfinance investors, gauge the impact of the global economic crisis on microfinance investing, and evaluate investors’ expectations for the investment class.  In this collaboration, IAMFI and Intellecap conducted an online survey in early May, presented the findings at a Forum held on May 21, 2009 in New York, NY and created the venue for equity investors to share perspectives and to network among peers.

The Forum
The IAMFI-Intellecap Microfinance Private Equity Investment Forum had a strong turnout of 40 Limited Partner (LP) investors, General Partner (GP) investors and industry service providers such as wealth advisors, law firms and rating agencies.  Many of the participants were survey respondents.  Some were experienced microfinance investors while others were beginning their evaluation of the sector.  J.P.Morgan, an IAMFI Charter Member, hosted the event at its Manhattan offices.  The meeting offered attendees the opportunity to hear the summarized survey feedback from Limited Partner (LP) and General Partner (GP) investors in microfinance equity, presented by Anurag Agrawal, Intellecap Vice President, Investment Banking.

Following questions and comments on the survey, Joan Trant, IAMFI Executive Director, organized a breakout session, dividing the attendees into three groups and suggesting topics for discussion.

In addition, the Forum provided a separate space for LPs and GPs to meet privately and discuss investment goals and options.

Breakout Session Conclusions
The suggested topics for the breakout discussion included: 1) the gap in LPs’ and GPs’ perceptions of microfinance private equity risk and return, 2) the role of development financial institutions (DFIs, the private sector branches of governments that support emerging countries’ growth) in private equity investment, and 3) the discrepancy between LPs’ stated allocation to microfinance and many MIVs’ fundraising shortfalls. 

The breakout groups were encouraged to discuss other topics based on their interests.  They used the Forum to share insights on regional microfinance environments, the role of governments, agricultural finance, consumption loans, sustainable energy loans, microinsurance, and the recently created Microfinance Enhancement Facility.

After 30 minutes of lively interaction representatives from each breakout team presented summarized comments.  Many of these are highlighted below. 

There is a gap in knowledge and communications between GPs and LPs.  This likely accounts for divergent perceptions of risk and return.  Many LP investors in microfinance make a small allocation of their portfolio, and cannot justify conducting lengthy due diligence and monitoring.  But the sense that they lack direct knowledge regarding their microfinance investments may make LPs perceive greater risk.  GPs would do well to increase feedback to their LP investors on the microfinance sector and their fund’s performance.  Those LPs seeking more information should make periodic field visits with their GPs and conduct independent due diligence as required. 

Despite “crowding out” concerns, DFIs play an important role in microfinance.  DFIs were early investors in microfinance equity, creating opportunities for the private sector to enter the market.  DFIs regularly facilitate the exit of private investors, and the DFIs’ continued commitment to the microfinance sector in this turbulent time brings stability and comfort.  However, anecdotal comments by private investors indicate that in some instances DFIs continue to offer capital at below-market pricing, effectively “crowding out” private investment.  The consensus view is that 1) DFIs should only make investments that private investors are unwilling or unable to make, e.g. in lower-tier or greenfield microfinance institutions (MFIs), 2) DFIs should focus on catalytic investments that entice private investment, especially in the current economic downturn, and 3) DFIs should exit investments once they have achieved the demonstration effect and private investors are ready to supply substitute funds.

The nascent nature of microfinance private equity reveals infrastructure needs in the sector.  LPs observe that few MIV managers possess a private equity background in emerging markets and microfinance investing experience.  The small deal size is a constraint for large institutional investors; one group discussed the potential role for brokers to bundle transactions and provide related due diligence.  A participant advocated for the establishment of a global microfinance stock exchange to promote a secondary market.

There is concern that a backlash against commercialization will make microfinance “the stillborn asset class.”  The case for commercialization must be made in a collegial way: clear and compelling in order to generate market demand, while acknowledging the significant role that philanthropic actors and non-profit leaders have played in the sector’s development.  Energetic debate continues about whether a for-profit business can truly maintain a “double bottom line.”  Lack of consensus on social performance metrics persists among donors, “Social First” and “Financial First” investors.

Valuation of microfinance equity is problematic.  It is difficult to value MFIs in the absence of a secondary market or other avenues for equity investment exits.  Valuations are highly specific to the MFI and to local macroeconomic, legal and regulatory conditions.  The relative value of microfinance private equity as compared with general emerging markets private equity is unclear. 

Current investment trends are mixed.  Participants were encouraged that 58% of MIVs met recent funding targets despite liquidity challenges and market turmoil.  In general, however, attendees believe that investor risk appetite is down.  LPs feel that equity multiples are not dropping as quickly or as low as they expect.  Some GPs have observed an LP paralysis, as LPs are in no rush to invest in a market they believe will drop further.  One investor noted that GPs must better articulate to LPs the value proposition of microfinance.  While some countries struggle, equity investment activity in others such as India is strong.

Participants’ feedback on the Forum was very positive.  Many indicated that they made new contacts and obtained valuable market intelligence through the survey and breakout sessions.  Intellecap and IAMFI will each continue to promote scale and sustainability in serving the financially excluded through for-profit investment.

Special thanks to Lindsay Clinton, Ranjit Koshi and Aparajita Agrawal of Intellecap, Vineet Rai of Aavishkaar Goodwell, Julie Abrams of Microfinance Analytics, and Jordan Filko of IAMFI for their assistance as facilitators and note takers during the breakout sessions.  Please see the survey slide presentation and read the related article, Microfinance Private Equity: Taking the Pulse of an Emerging Investment, co-written by Lindsay Clinton of Intellecap and Joan Trant of IAMFI, which summarizes the survey findings.

IAMFI followed up with additional insights on microfinance private equity by hosting a Webinar on May 27, 2009 to present the findings from the CGAP – J.P.Morgan study, Microfinance - Shedding Light on Microfinance Equity Valuation: Past and Present for IAMFI members and guests.  For more information, please view the Webinar event summary, which includes links to the study and Webinar slides.

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IAMFI-S&P Teleconference - Microfinance Institutions: Changing Strategies for Changing Times
Virtual Event, February 24, 2009

The call began with opening remarks by Joan Trant, Executive Director of the International Association of Microfinance Investors (IAMFI) followed by introductions of the Standard and Poor’s (S&P) microfinance experts speaking on the call:

    • Andrea Esposito, Managing Director Microfinance, New York
    • Gary Kochubka, Senior Director Structured Finance, New York
    • Angélica Bala, Director, Latin American Financial Institutions, Mexico
    • Nelun Wijeyeratne, Microfinance Project Manager, New York

Call topics included a discussion of the effects of the economic crisis on microfinance, the response by microfinance institutions (MFIs) and S&P’s pilot MFI rating project in Latin America.

MICROFINANCE AND THE ECONOMIC CRISIS
Historically, MFIs relied on philanthropic or public funding, and their microentrepreneur borrowers were largely immune to widespread economic trends, but with the global integration of MFIs this has changed.  It is now important to consider how MFIs might be impacted if foreign direct investment declines, if there are disruptions to local and global capital markets, or if there are fluctuations in remittances from abroad.  MFIs have begun to face more competition from commercial banks and also from other MFIs. 

Combining economic downturn, decreased remittances, and higher food costs, the current global crisis has no precedent in the experience of the microfinance industry.  The liquidity crunch has increased cost of funding by 200-500bps.  Tighter interbank markets, particularly in Russia and China, have reduced local funding.  On the other hand, multilaterals have stepped in, evidenced by the KfW-IDB $500 million fund.  Increases in deposits may offset some MFI liquidity issues but their growth is uncertain and varies by region.  There is an asset liability mis-match, with longer term borrowing by MFIs underlying shorter term loans to microentrepreneurs, but this may be changing as lenders to MFIs shorten tenors.  Macroeconomic factors are affecting asset quality, particularly through a decline in remittances and increase in non-performing loans (NPLs).  Inflation is up in some countries, such as India and African nations, which are big food importers.  Foreign exchange exposure is a major issue, since many MFIs borrow in hard currencies and receive repayments in local currencies, meaning their debt can double or triple at any time.    

While MFIs have recently experienced high growth in earnings, the current crisis may have a serious impact on this trend.  Their formerly high net interest margin is now suffering due to the liquidity crisis causing increased costs of borrowing.  This is hitting smaller MFIs particularly hard given their inability to take deposits and their lack of access to concessionary funding.  It is also more difficult to pass these costs on to borrowers who are finding it harder to repay.  Many MFIs don’t want to pass on these costs anyway as it conflicts with their double bottom line goals.  Already high operating costs are rising with inflation and increased staff and transportation costs.  Growth is slowing and concerns about asset quality and efficiency are intensifying as staff productivity suffers with more time devoted by loan officers to loan monitoring and collection. 

In the specific experience of Latin American MFIs, interest rate caps have been manageable and competition is strong.  Inflation, customer indebtedness, and NPLs are all increasing in the region, and profitability is down but is being offset in some MFIs with investments in IT platforms.  In some cases, for example in Colombia, clients have taken on additional debt, often via credit cards, causing MFIs not to renew loans.  Many fledgling credit bureaus list names of borrowers but no credit data; this lack of comprehensive indebtedness information is a form of systemic risk. Customer education should be a priority, to build awareness of how dangerous it can be to have multiple loans at the same time.  

MFIs must improve their ability to identify and manage risks, and the right measures must be taken to contain non performing asset growth.  Most Latin American MFIs are doing this.  Currently return on assets is low but can be improved in the future with better NPL ratios. 

In terms of structured finance in the industry 2008 was a quiet year of three proposals, all postponed until 2009 and one not likely to proceed.  Portfolio managers may enter the market later depending on market conditions.  Investor appetite remains, but the widening of interest rates is disadvantageous to getting deals done.  BlueOrchard Loan for Development 2 (BOLD 2007), a Collateralized Loan Obligation (CLO) of unsecured loans totaling US$110.2 million, was the first microfinance CLO rated by a major rating agency (S&P) and is performing to rating expectations.  For now microfinance is probably limited to a pool transaction basis but a single MFI portfolio deal is possible in the future.  The microfinance experience is comparable to other emerging market sectors – fairly strong, with remittance deals closing and some market interest.  Foreign currency swap pricing plays into the overall deal structure, with entrants such as The Currency Exchange (TCX) out of Europe and Cygma from the U.S. targeting microfinance transactions vis-à-vis traditional market players.

MFI RESPONSE
Some MFIs have been addressing the current challenges with more conservative underwriting, increased knowledge of their customers, and more monitoring of loans and repayment.  One way of gauging an MFI’s ability to face these challenges successfully is assessing their information systems’ capacity to track changing conditions and facilitate quick responses.  To address the competing challenges of lowering costs and stabilizing revenues MFIs will need to establish prudent growth plans, seek increases in efficiency, be vigilant in managing client relationships, and maintain liquidity. 

MFIs are looking to different funding options for temporary liquidity or long term development, with some falling back to their original core funders such as multilaterals, socially responsible investors, and foundations.  Enhancements to traditional funding are also taking place such as third party partial credit guarantees to improve access to loans.  Bilateral loans may resurface.  Foreign currency risk is an issue for both MFIs and investors.  In microfinance, hard currency lending (dollar and euro) remains prevalent, and while local currency loans may be more appropriate for smaller, less sophisticated MFIs this presents an issue for investors seeking to hedge less liquid currencies.     

From the ratings perspective it is difficult to guess now at the full extent of the impact on microfinance of the global economic downturn,  Public ratings for MFIs now range from B to BBB on a global scale and such a range connotes a spectrum of weaknesses and strengths.  Those most prone to default are rated lower, meaning they are most subject to prevailing market conditions.  At present, raters are maintaining stable outlooks for all MFI ratings.  Although many are going through tough times as a result of the crisis, thus far they are managing their difficulties well.  Performance distinctions will be reflected in the ways MFI managers react to the present challenges. 

MFI RATINGS CRITERIA
The goal of S&P’s microfinance rating program is to bring transparency to the market with standardized comprehensive global sets of factors in analysis in order to make MFIs comparable across borders and asset classes.  This basic mission has not been compromised by the current economic environment; there is now an even greater emphasis on transparency.  Both the rating symbol and the report with analysis are increasingly important with the convergence of commercial equity and debt investors in microfinance.  While investors do their own internal analysis, the role of raters is to provide an external benchmark. 

The S&P MFI rating methodology is based on the firm’s standard financial institutions criteria with some adjustments made to reflect traits particular to MFIs.  This covers system-wide factors, ownership, management governance, region-wide criteria, and more.  There are distinctly unique aspects of microfinance including high volume and small transaction size, incomplete supervisory regimes, the double bottom line, high variability of management skills and types of ownership, macroeconomic factors with specific effects on MFIs, various lending methodologies (such as group vs. individual), asset liability management challenges, longer term funding issues, and distinctive forms of ownership (non-profit, for-profit, regulated, unregulated), to name a few.  Some broader factors, such as political instability or civil strife (as evidenced by the post-election violence in Kenya), lack of collateral typical of microfinance clients, and natural disasters may impact MFIs more so or differently than other economic actors. The weighting of each factor differs depending on the larger economic situation, the regulatory environment, and country-specific customs and laws. 

Risk management and asset quality in microfinance are treated differently in rating from large banks.  Risk management systems are assessed to gauge an MFI’s ability to deal with the risks specific to MFIs.  Risk policy articulation, underwriting standards, efficiency, and internal procedures are important when assessing an MFI’s ability to handle risk.  In this sense slowed growth due to the present global economic downturn may offer an opportunity for MFIs to put in place comprehensive risk management systems.

Regulatory and legal frameworks also impact the strength of MFIs significantly.  Not all MFIs are regulated, and different legal structures may be regulated with varying intensity creating an uneven playing field.  Often government regulation, such as interest rate caps and subsidies and guarantees for public MFIs, precludes the existence of a healthy microfinance sector.  Governments can instead promote sustainable microfinance industries by creating prudent, flexible, clear regulation based on sound understanding of microfinance and commensurate with the actual risk parameters of the sector.  This may include regulation allowing deposit taking which benefits both clients and investors, and client protection measures including financial education and transparency. 

In total, 35 IAMFI members and guests participated in the call.  One participant offered this feedback, “Really appreciated the chance to participate. I thought it was a very useful and overall well structured call. I think the S&P people were to the point and seemed to have a good understanding of the issues... it definitely improved my understanding of the situation.”

During the Q&A section of the call, the recent S&P publication ‘BRIC By Name, BRIC By Nature?’ was mentioned.  For information on how other emerging markets have been affected by the global economic crisis please read this document.  For more information on the topics covered in the call, please read the publication ‘Microfinance Institutions: Changing Strategies for Changing Times.’

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IAMFI Webinar: Foreign Currency Considerations in Cross Border Microfinance Investment
Virtual Event, November 20, 2008

In the context of the global financial crisis and rising U.S. currency, cross border microfinance investment gains may be offset by currency losses.  Recent experience proves the value of foreign currency hedging in microfinance investment.  For example, four Latin American microfinance institutions (MFIs) experienced a year-on-year drop in net income of 7% to 14%, and fifth suffered a 75% decline, due to currency devaluations.  Similarly, two Eastern European MFIs’ net income decreased by 14% and 43%.  These currency-related losses occurred in different nations in different years, underscoring the importance of currency protection in prudent asset liability management.  As part of its educational activities, IAMFI hosted a webinar for investors better to understand the opportunities and strategies for hedging cross border microfinance investment.

Konstantin Andreev of Cygma and Brian Cox of Micro FX Solutions were IAMFI’s guest speakers.  Konstantin provided an overview of recent currency trends.  He presented several hedging strategies and tools for investors to mitigate risk, such as currency forwards, options and swaps.  Brian focused on the impact that currency risk has on MFIs’ balance sheets.  He noted that currency devaluation costs are often passed via higher interest rates to microborrowers - who are least able to manage the impact of currency movements - and offered some hedging solutions for MFIs.

Thirty-five Webinar attendees representing every aspect of the microfinance industry participated in the event and engaged in a wide-ranging Question & Answer session following the presentations.

Key conclusions drawn from the Webinar include: 1) MIVs and MFIs must establish sound asset liability management policies that incorporate currency risk mitigation; 2) shorter-term loans and country diversification reduce risk in the current environment; 3) investors are better equipped than most MFIs to assume currency risks and ideally will lessen them through hedging instead of passing them down the microfinance chain; 4) frontier currencies are exhibiting wider bid-ask spreads, which increases hedging - and therefore funding - costs; 5) some countries’ regulations prohibit effective hedging; 6) currency forward rates at times are poor predictors of future exchange rates, but they represent industry consensus and thus are the best guide; 7) seeking increased local funding is an opportune strategy for MFIs to pursue; and 8) cross border equity investors are particularly susceptible to currency risk and should hedge investments accordingly.

IAMFI is grateful to Brian and Konstantin for facilitating the dissemination of timely information about foreign currency implications in microfinance investing.  It likewise extends thanks to Webinar attendees for using IAMFI as a forum for sharing their perspectives.  Participant feedback included the following:

“Thank you so much for inviting us to the Webinar, as always it was really useful and the topics were the right ones to talk in the actual economic crisis.”  - M. Barragán, LocFund

“Great conference, and very convenient technology!  Thanks a lot for coordinating.”  - C. Novak, Morgan Stanley

“Excellent Webinar, thanks! Both presentations and the Q&A responses were impressive.”  - J. Abrams, Microfinance Analytics

For more information, please view Konstantin Andreev’s presentation, Brian Cox’s presentation, and additional informational articles.

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IAMFI Networking Lunch – New York IAMFI Networking Lunch, New York City (left to right): Michael Hokenson and Sam Moss, IAMFI Board Chair
New York, November 13, 2009

 

 

To facilitate dialogue among microfinance investors, fund managers and industry service providers such as wealth managers, foundations, rating agencies and lawyers, IAMFI’s Board of Directors will be hosting networking luncheons in cities where there is an active microfinance community. 

 

 

IAMFI Networking Lunch, New York City (left to right): Tryfan Evans, IAMFI Board Member; Didier LamarcheIAMFI Networking Lunch, New York City (left to right):
Michael Hokenson and Sam Moss, IAMFI Board Chair

 

 

IAMFI’s first lunch event was an informal affair held at IAMFI’s offices and attended by industry participants in the metro area, IAMFI’s Board and association staff.  Guests engaged in lively conversation with both new and familiar faces.  After the meal, the event turned into a roundtable discussion in which attendees updated the group on their organizations’ activities and shared their perspectives on the industry, particularly in light of the challenging financial climate.

 

 

IAMFI Networking Lunch, New York City (left to right): Mary Brusewitz and Henry Gonzalez

IAMFI Networking Lunch, New York City (left to right):
Tryfan Evans, IAMFI Board Member; Didier Lamarche


Given IAMFI’s goal to improve information access and networking, it was particularly pleased with the attendees’ positive feedback on the event.  Please visit Upcoming IAMFI Events periodically for information on future networking lunches.  In some cases these will coincide with a parallel microfinance event being hosted by a third party, providing both local and visiting microfinance actors with a more diverse networking opportunity.




IAMFI Networking Lunch, New York City (left to right):
Mary Rose Brusewitz and Henry González

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IAMFI-Fitch Ratings Investor Teleconference
Virtual event, August 6, 2008

IAMFI and Fitch Ratings co-hosted an investor teleconference entitled Microfinance: Its Success Could Be Its Biggest Risk.  The program began with presentations by Fitch Ratings’ microfinance specialists of their recent publications, Special Report -The Microfinance Sector: Its Success Could be its Biggest Risk and Criteria Report – Microfinance Institutions – Factors in Risk Assessment.  The Fitch team addressed some of the most current and fundamental issues in microfinance investing, such as factors in risk assessment of MFIs, the transformation process and its implications, the impact on microfinance of its emerging market environment, and the potential role of capital markets in the future of the industry. 

A dynamic Q&A session followed, driven by a diverse group of over 50 participants.  Representing varied perspectives and levels of experience in microfinance investing, participants’ questions focused on the current nature of the industry, the potential course of its rapid development, the role of social impact in credit ratings, the future of the correlation factor, currency risk management, and the effects on microfinance of both rising food prices and inflation. 

This event was successful both in facilitating the dissemination of new information about microfinance investing and in providing a forum for discussion among microfinance investors and other industry actors, two core aspects of IAMFI's mission.  The research, presentations, and administrative services contributed by Fitch Ratings were instrumental to this success.  View the Fitch Ratings’ summary slide presentation related to the teleconference here.

For a summary of the event click here.

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Microfinance Investors Reception
San Francisco, July 15, 2008

reception
Sam Moss (third from left), Board chair, IAMFI, with (L-R): Ann Miles, director, IAMFI; Crystal Hutter, investments manager, Omidyar Network; and Joan Trant, executive director, IAMFI, at the Omidyar Network – IAMFI Microfinance Investors Reception in San Francisco, July 2008.
investor reception
Crystal Hutter, Omidyar Network Investment Manager, welcomes guests to the Omidyar Network - IAMFI Microfinance Investors Reception
Following the Microfinance West conference, IAMFI and Omidyar Network co-hosted a Microfinance Investors Reception for 130 members and guests at one of San Francisco’s top venues, McCormick and Kuleto’s, overlooking Alcatraz and the Bay.  The Reception offered conference attendees and Bay area investors the chance to network.  By all accounts, the Reception was a tremendous success, garnering the following tributes from attendees:

"What a great event - there's a real buzz in the room!"

"The reception was the best part of the two days.  I met new people who were investors, not just the usual suspects."

"My organization (a family office) had looked into microfinance as an investment option a few years ago but didn't see any opportunities that would fit our strategy.  I met two investment managers this evening that I look forward to following up with."

 

 

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Advancing Microfinance for Market-Driven Investors – IAMFI Board Panel
Microfinance West: The Investment Opportunity Conference
Hosted by FRA and SVMN, San Francisco, July 14-15, 2008

Members of IAMFI’s Board presented a panel entitled "Advancing Microfinance for Market-Driven Investors" at the Microfinance West conference hosted by Financial Research Associates and the Silicon Valley Microfinance Network.  Executive Director Joan Trant moderated the panel, comprised of Tryfan Evans (Omidyar-Tufts Microfinance Fund), Terri Lecamp (Plainfield Asset Management), Ann Miles (BlueOrchard Finance USA) and Sam Moss (Gray Matters Capital).  This was the conference’s only panel fully comprised of investors discussing microfinance investment from their unique perspective, in contrast to the more prevalent presence of donors, microfinance networks, microfinance institutions and industry service providers.  In this sense IAMFI achieved two of its key goals on behalf of its membership: to represent investor views and to foster dialogue among all industry participants.

IAMFI panelists shared their thoughts on investing and on key microfinance issues impacting the flow of private sector funds to investment vehicles and in turn to microfinance institutions, using the following outline to guide the session.

Views on Microfinance Investment in the Current Environment (T. Lecamp and T. Evans)
In addition to the challenges inherent in a nascent asset class, emerging market nations, microfinance institutions and their customers are subject to the broader economic unease due to:

  • Inflation
  • Interest rates
  • Reduced debt options
  • Energy and food prices

What concerns do Limited Partner investors have in light of the current challenges?  What is compelling about microfinance despite these issues?

Common Questions Investors Ask (A. Miles)
Investors increasingly seek to commit assets to microfinance but investment decisions are hindered by a lack of information and transparency.  What are Limited Partner investors’ top questions and concerns as they evaluate investing in microfinance?

Some Examples of How Investors Mitigate Risks
Several microfinance investment vehicles and industry service providers are developing tools to help investors reduce risk.  What are some of these tools and what may investors look forward to as the microfinance sector evolves?

  • Liquidity (S. Moss, A. Miles)
    • Antares Fund
    • Dexia Fund
  • Transparency (T. Evans, A. Miles)
    • Fund evaluation methodologies and valuation
    • CGAP fund disclosure benchmarks, LuxFLAG, et.al.
  • Reputational Risk [if time permits]  (T. Lecamp, S. Moss)
    • Sample investors’ approach to balancing financial and social returns
    • IAMFI efforts to focus impact measurement on industry-strengthening indicators

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