Mysterious Update from Microfinance P2Ps

Readers of this blog or the Next Billion blog will have detected a certain cynicism of mine regarding peer-to-peer organisations (P2Ps) operating in the microfinance sector. In fact most of my concerns are focussed upon Kiva. I find Zidisha a refreshing and innovative alternative to Kiva, but not without problems. MyC4 leads the way in transparency, but never quite took off, and recently closed down all operations outside Kenya. Kubaru remains too small. Lendwithcare are interesting, but perhaps not for the right reasons. I was disappointed at their recent blog post. It was so flawed, despite a decent premise, that I imagine they regret publishing it (see my comment below the article).

However, a fascinating development is underway currently that is potentially the first innovation in ages in the P2P space in a while, but could also be a disaster. It concerns MyC4’s latest and largest loan.

There are basically two models for intermediating funds. Wealthy investors and corporations lend substantial sums to specialised investment funds (MIVs – Microfinance Investment Vehicles), who then make large loans to Microfinance Institutions (MFIs). BlueOrchard is a good example of this. And P2Ps take thousands of small loans from individuals and lend them directly to poor clients, usually via an MFI.

Intermediary Lenders Amount Borrower Amount
MIV Corporate Big MFI Big
P2P Individuals Small Client (via MFI) Small

There are some exceptions to this. Triodos is an MIV but also takes funds from individual retail investors who can invest small sums. Zidisha is a “pure” P2P that does not go via an MFI. And there are some valid concerns regarding whether Kiva is a P2P at all in the strict sense of the word. But in essence this simplification suffices for the current discussion. MicroPlace was something of a hybrid: it took funds from individuals and made wholesale (large) loans to MFIs, but it collapsed.

MyC4 have decided to merge the two models (comparable to the MicroPlace effort). The source of funding is apparently similar to the traditional P2P model, i.e. lots of individuals bidding small sums, but rather than making hundreds of individual small loans to poor borrowers, the loans are lumped together into one €250.000 loan to a Kenya MFI called Premier. Thus the heart-warming feeling of making individual loans to individuals is partially eroded. One hypothesis about the success of the microfinance P2P sector, as typified by Kiva, is that it is this emotional connection that draws people in, offering a fluffy feeling (valid or otherwise) to the lender that he or she has helped an individual person. Thus the MyC4 model enables us to observe the impact of removing this effect in relative isolation.

Other differences with this wholesale loan are that the MFI is assuming the credit risk of the underlying borrowers, and also the foreign exchange risk. But in exchange for this reduced risk, the MFI will cap the interest it will pay to the investors at 4%, which is substantially lower that MyC4′s typical P2P loans. Minor issues raised by MyC4 users (myself included) are that the due diligence of this MFI seemed scant – it received a stellar risk rating despite being a start-up, there was no discussion of the interest rates the MFI will subsequently charge the poor etc. MyC4 responded to these questions adequately.

So far so good. The bidding ends this month, and we are watching it closely. I have not yet bid, for reasons which will come clear shortly. But there is a little catch to this loan that is potentially a serious alarm bell.

On the 30th of June I downloaded the 50 largest bids on this loan. This is the maximum you can view on a single page on MyC4, and covered a substantial portion of the entire bids, which was a little over 600 at the time. Bids on this loan ranged from €5 to €57,599. The 50 largest bids started at €122, and represented marginally over 50% of the entire bids at that point. So, what we see is that a few big investors account for the lion’s share of the bidding – nothing particularly surprising there. However, dig a little deeper and there is a weird anomaly.

80% of the capital raised by the top 50 bids are from MyC4 themselves. They are bidding on their own loans. MyC4 Foundation, Kjaer Group, MDG3, MyC4 Board, The Way Forward, MicroFund 1 and KBFUS are all controlled by MyC4, or more specifically the founder and CEO Mads Kjaer. There is nothing fundamentally wrong with this, I am not suggesting anything murky here. But is it normal for the main customer in a shop to be the owner of the shop? Total funding from the top 50 lenders on 30th June was €120,011 of which €96,530 (80%) was from MyC4 controlled entities.

I mentioned that the interest rate is capped at 4%. This is the interest paid to the lenders. In fact there are two additional costs to the business: fees and interest paid to MyC4 and the facilitator of the loan. These add approximately 4% to the cost of the loan, and the facilitator in this case happens to be none other than MyC4 East Africa, a subsidiary of MyC4. So, we have a slightly circuitous scenario: MyC4 bidding on its own loans, earning interest as a direct lender (typically at 4%), earning approximately this rate again via its commission to the MFI and via its own facilitating subsidiary. Again, I am not suggesting this is wrong. It is simply a rather bizarre way to lend money to a bank in Kenya. Obviously the upside to MyC4 is that it encourages other lenders to jump on the bandwagon and also lend, i.e. MyC4 can leverage its own loan to the bank.

So, today I revisited the website and just over €7,000 new bids from these MyC4-related entities have emerged. Time is running out, and the bid is filling very slowly, particularly from the non-MyC4-related folk such as you and I. What are the implications for this?

I suspect that MyC4 do not want this pioneering loan to fail. They will inject the funds required to top this up at the required interest rate. MyC4 have deep pockets, and have already channelled over €103.000 into this bid (which currently stands at just over €142.000 in total), so MyC4 is by far and away the main lender here. If this fails it will be embarrassing for MyC4. The MFI will be disappointed. All the legal fees, contractual expenses and due diligence costs will have been wasted. Smaller lenders will be irritated that they tied their capital up for a couple of months during the bidding process only to have it returned to them (without interest). And MyC4 has focussed all its operations in Kenya, so a failed loan of this size would not do their reputation any good.

But perhaps most worryingly, this potentially innovative form of intermediating capital will have failed at the first hurdle. There are exactly 3 weeks until the bidding closes, and this loan requires €108.000 more to be filled. Judging from the progress to date, this is unlikely to come from the smaller lenders, so MyC4 face only 3 options: risk the loan failing; get some big lenders in promptly; or make up the difference themselves. The beauty of all this is that thanks to the stellar transparency of MyC4, we will see exactly how this plays out, in real time. Sure, MyC4 could discreetly bid using the “anonymous” option, but this would be highly suspicious – I doubt they would attempt so unsophisticated a trick.

So, what can we conclude from all this? First, once again MyC4 are innovating and doing so transparently. Full marks for that. This loan could send an important signal to the P2P sector. If this is successful, and lenders are not perturbed by the lack of smiling faces of women with goats and sewing machines, then this is certainly a more efficient mechanism for channelling funds into microfinance versus the traditional P2P model. Crowd-funded, but wholesale distributed. This will result in a lower cost of capital, and less effort (with the associated operating costs) for the MFI, which will hopefully pass to the clients via reduced interest rates.

But, the evidence to date suggests that the regular “crowd” lenders have not been too impressed with this. The causes are hard to discern – it could be the lack of the fluffy feeling of traditional P2P lending (photos of women with goats etc). But it also could be simply that the interest rate is too low. Or that they are hesitant to bid on a new model, especially to a start-up MFI without a track-record.

Secondly, while this demonstrates how woefully un-transparent are institutions such as Kiva, it also demonstrates that such stellar transparency comes at a price – MyC4 are likely not too keen for everyone to know that they are the main bidder, and the provider, earning fees in the process.

Thirdly, this does raise some questions about alignment of interests. MyC4 has information about this loan that the regular lenders do not, and also additional income streams from this loan beyond the simple interest earned on bids (fees etc.). It also has its own reputation at stake. By sitting on both sides of the table (administrating and bidding on a loan), but with asymmetric information, this could provide a conflict of interest. For example, suppose this loan is successful and wholesale lending takes off, and we see MyC4 bidding on some such loans, but not others. If we then see that MyC4 is consistently bidding on the better, non-defaulting loans, and not on the problematic loans, could this be considered a form of insider-trading? I have no reason to suppose MyC4 have any incentives other than to grow the platform, but the question always remains when people sit on both sides of the table and have different levels of information. It creates doubt.

One key example of the asymmetric information available to MyC4 and not to the bidders is simply that MyC4 can see the auto-bids, while regular users cannot. So they know already to what extent current lenders (whom MyC4 are competing against in this Dutch auction process) are willing to reduce the interest rate charged. MyC4 could benefit hugely from this information particularly in the later stages of the bidding process, and it would be extremely tempting for them to use this.

Finally, there may be an ironic self-fulfilling prophecy here. If I am correct, and the loan is slow to fill as the deadline approaches and MyC4 have to cough-up the difference, there is an obvious arbitrage opportunity. Two conditions need to be met for this loan to clear – the full €250.000 has to be raised, and the average interest rate has to be at or below 4%. If either condition is not met, MyC4 have to step in with the required amount at a sufficiently low interest rate to reduce the average rate to 4%. Anyone bidding at this stage, with an interest rate of say 20%, is fairly guaranteed to win their bid. There are enough bidders asking above 20% (up to 50% in fact) that if any bidders are competed out of the bidding process it is unlikely to reach down to the 20% level. And if the bid is unsuccessful, or if MyC4 bid such a vast sum that even a 20% loan is not accepted – so what – you lose nothing, the funds are returned to your account. So, essentially there could well exist an opportunity to exploit the goodwill and motivations behind MyC4. Obviously, if enough people do this then it becomes a self-fulfilling prophecy – if enough people anticipate that MyC4 will step in that they increase their last-minute bids accordingly, perhaps MyC4 will not need to step in after all!

Anyway, watch this space – this is an interesting quasi-experiment acted out in full view. It will likely have implications whatever happens. On the one hand we see Kiva moving in the opposite direction, toward the pure P2P model (as developed by Zidisha). MyC4 is essentially moving towards the MIV model (crowd-funded, wholesale distributed), and perhaps they can succeed where MicroPlace failed. But let’s not forget three important factors here:

  • However microcredit is financed, it is the impact on the borrowers that determines the ultimate success or failure.
  • The loan will still cost the MFI at least 8%, and an MFI able to access traditional MIV funding may find that more attractive.
  • MyC4’s existence is essentially subsidized by its founder and related parties. At some point this subsidy will run out. MyC4 has been around for some years and has not yet demonstrated a scalable, self-sufficient lending model. Even if this wholesale loan is filled, it may be premature to crack open the champagne. Unless, of course, MyC4 are paying!

Good luck to MyC4 on this, and I will formally ask them to comment on this post if they wish.

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Microfinance Reality Check

In 2009 I bought a 5-year bond issued by IFFIm – the International Finance Facility for Immunisation. I invested £5000 and received £5810 a few days ago (with accumulated interest). Not the best return on capital in history, but not bad considering current interest rates and the intervening financial crisis. The bond was AA-rated with sovereign guarantees from the UK, France, Italy, Norway, Australia, Spain, Holland, Sweden and South Africa. Pretty safe basically. The other perk was that for every £1000 invested they guaranteed to vaccinate 130 kids. So, my £5k resulted in £810 in interest and 650 kids vaccinated. Not bad for filling out a form.

I work in microfinance. I am aware of the (mostly mediocre) results we are discovering as a sector regarding our own impact upon poverty. I am also aware of the crises that periodically land the sector in trouble, and the dangers of over-indebtedness amongst clients. It irritates me to see the poor having to cough up interest rates of 150% in the name of poverty alleviation. I was appalled at the cases of abuse in Andhra Pradesh. I was not surprised when the Nicaraguan microfinance sector collapsed, and am watching with morbid curiosity as the sectors of Peru and Mexico reach dizzying heights of over-indebtedness and recklessness.

The key question is whether £5000 invested in microfinance would have had a greater or lesser impact than the same sum lent to the GAVI Alliance and used to vaccinate children. We can debate about the subtleties of impact measurement techniques all day, but what concerns me is that the question is not even asked. Is the impact of 650 vaccinations for kids greater or less than the impact of £5000 lent to their parents?

According to the latest World Bank paper on the topic, consumption increases by 0.42% in Bangladesh as a result of microloans. So, £5000 in loans would increase consumption by roughly £20. Is that better than vaccinating 650 kids? Obviously these two outcomes cannot be directly compared, and ideally we could do both. Investors in for-profit microfinance institutions might find lending more attractive than vaccinations, as they can earn substantially higher returns. But what do the poor think?

The microfinance sector is approaching the $100 billion mark. That is a chunk of money and it is reasonable to ask whether microfinance has been the best deployment of this capital. The argument over whether microfinance works or not is a red-herring. The key question is whether this is the wisest use of scarce capital. In all other areas of economics, projects or interventions are compared to their next best alternatives. But not in microfinance.

No one is asking these awkward questions, least of all the people who run the microfinance sector. As David Roodman pointed out, we have created a “microfinance industry”. Industries have vested interests and lobbyists. Do we really expect Grameen, Accion, Opportunity, Smart, Finca, Kiva etc. and the microfinance fund managers to ask these questions? Their opinions are foregone conclusions when their very existence (and salaries) depend on the endless expansion of microfinance.

The only article I have seen directly tackling this question was by Paul Polak and Mal Warwick, authors of The Business Solution to Poverty. They make an astute observation analysing where social impact investors are directing their capital:

Warwick social impact graph

“In our view, microcredit is one of the least worthy fields in social enterprise. That so much of the scarce resources available to address the challenges of poverty and climate change is squandered on for-profit microfinance ventures is a tragedy. While some microcredit programs — principally those operated as nonprofits — have achieved a lot of good, the rush by the big banks and profit-minded entrepreneurs into the field has proven to be a curse, not a blessing.”

Perhaps the two great tragedies of microfinance are as follows:

1) We have deployed vast sums of capital with modest outcome. This may have been more effective in other areas.

2) The sector refuses to address these simple questions in a quest to protect itself from the rigours of scrutiny.

Some microfinance is good, effective and ethical. But has the sector grown too large, and risks crowding out more effective interventions? This is surely a valid question?

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How Can I Invest in Microfinance? Part 2: My Zidisha Experience

I first came across Zidisha on a radio program with Rose Aguilar in San Francisco. Kiva had refused to participate, so Rose arranged for Zidisha to participate by phone. Knowing very little about them I was a little nervous. However, as we discussed matters, live on-air, I found myself provisionally impressed with their model. So, some months later I decided to analyse them in the best way I know how – I put some money on the platform. There is no substitute for decent analysis than having skin in the game!

Recently there has been some debate over the effectiveness of Zidisha. I can neither confirm nor refute the statistics claimed, or the conclusion the (anonymous) author arrives at. What I shall do here is simply explain why I have found this to be an intriguing model so far.

My bottom line on Zidisha

I uploaded $1.173 in total. This was actually in two chunks a few months apart, but for all practical purposes let’s assume this was one transfer, about 18 months ago. This number consisted of a $35 transaction fee paid to PayPal, and a voluntary $138 donation to Zidisha (I was feeling generous). Anyway, this resulted in $1.000 to lend on the platform.

I downloaded my entire transaction history from the website on April 6th 2014.

I bid a total of $2.019 over the entire period, of which $201 were not successful. Another Zidisha lender basically offered a lower interest rate than me, or the loan was not made for some reason and the funds returned to me. So, the total I actually lent over this period was $1.818. This is more than the initial funds available because some loans were lent, repaid and re-lent.

I have received a total of $829 over the period. This includes capital repayments, interest repayments, occasional defaults, and foreign exchange losses. I do not know the breakdown of these, not does it interest me much at this point. Now, if I lent a total of $1.818 and have been repaid $829 over the same period, my current outstanding should be the difference between these two: $989.

My actual current outstanding portfolio is $966, plus I have $30 in bids outstanding, and $11 in cash. Thus the current value of my “assets” on Zidisha is $1.007. This is $7 more than the initial money I uploaded. In short, I have made a profit. This profit does not cover the PayPal fee I was charged, so overall I have made a minor loss, but I’ll focus only on the transactions done on the platform.

I made a modest 0.7% over 18 months, or approximately 0.4% APR. For all practical purposes I broke-even. What is interesting is that this is net of all foreign exchange losses, late or missed payments, outright defaults etc.

Am I typical Zidisha lender?

Probably not. The total lending by Zidisha’s 7800 clients is about $2m, so the average lender has done about $250, suggesting I have lent about 4x more than the typical Zidisha lender. Also, I have worked in microfinance for a little over a decade, including in the P2P space, and spent much of this time in the field with banks and clients, so I may have a better idea of clients more likely to repay a loan. Plus many of the accumulated defaults at Zidisha appear a historic legacy from prior periods, so I may have benefitted from the tightened policies of Zidisha over this period. But I am not presenting a generalised opinion here, but simply stating my personal experience.

I have made 40 loans on Zidisha: 10 have been fully repaid, 1 outright defaulted, and 29 are underway. The weighted average interest rate which I charged was 4.4% flat, equivalent to about 8.8% in APR terms. This ranged from a few 0% loans to one at 20%. I forget why I charged Hellen Festo so much – sorry Hellen!

If I look at the average actual final interest rate charged on these 40 loans, it is 9.2% flat. However, this includes the 5% flat fee that Zidisha charge. I can confirm this is the case because the four loans I did at 0% were because the client refused to pay any interest to the lenders, and the interest rate on these loans is precisely 5% flat – the Zidisha fee alone. So, this suggests the average other lenders on these 40 loans charged an average rate of 4.2% flat (9.2% total interest less 5% Zidisha fee), or 8.4% APR – slightly less than the rate I charged (I shouldn’t have charged Hellen so much – I feel bad as she’s 100% on schedule). And of course, Zidisha’s 5% is flat, so equivalent to roughly 10% APR.

However, at the end of the day a total interest rate of 9.2% flat (about 18.4% APR) is an extremely reasonable interest rate in the microfinance sector. The cheapest loans that I have co-financed cost 5% flat (10% APR), the most expensive was 19.66% flat to Hellen, or nearly 40% APR (partly because of me charging such a high rate).

But, the key consideration here is that with this overall interest rate, I lost no money. Nor did I make any. I basically broke-even (excluding the PayPal fee). Were I to increase my average interest rate only a small amount I could probably cover the PayPal fee also.

Zidisha recently announced they would cap lender interest rates at 5% flat (roughly 10% APR). Frankly, this wouldn’t really effect my lending, as my average rate is below this anyway, but it will impact a few Zidisha lenders. And with the Zidisha fee fixed (at least currently) at 5% flat, this equates to a maximum possible interest rate of 10% flat, or 20% APR. Reasonable by any standards. Which MFIs, particularly in Africa, are charging such rates? Which of Kiva’s African partners offer loans at such rates.?

One blogger has suggested that this would be insufficient to cover the default and forex losses of lenders. I have no reason to dispute his/her statistics, but all I can say is that this is not my experience on Zidisha. The blogger makes a fuss over the one-off credit rating fee that the clients have to cover (about $12), suggesting this should be included in the APR calculation. What about the bus fare to get to the internet café? No, I consider this a reasonable additional one-off fee that is not only entirely justified for this lending model, but might also dissuade outright fraudsters from trying to manipulate the model. I am in favour of transparent pricing, but if this blogger finds Zidisha to be non-transparent – check out Kiva – they don’t even make an effort to mention an interest rate, and eventually conceded that in fact they have no idea what they are! The blogger criticises Zidisha for citing flat interest rates instead of APRs, a point I agree with, and Zidisha seem to be considering this. Great. Zidisha could be even more transparent, and I hope they are, but I am a transparency fanatic: my website is www.microfinancetransparency.com (unrelated to the excellent website www.mftransparency.org), and I do not find Zidisha deceptive, particularly when compared to the likes of Kiva. I pointed this out to the (anonymous) blogger in his/her comments section, but received no response. However, for true transparency, see MyC4.

Admittedly I am basing this entire analysis on a number of large assumptions. Firstly, that my current outstanding loans will be repaid with the same reliability as my completed loans. I cannot prove this, nor can anyone else – that would require a crystal ball. Perhaps I have simply been lucky? Perhaps I am particularly skilful in selecting clients to lend to! But this is my data, on my loans, at my interest rates, with my forex and default rates. The bottom line is simple: I have basically made no money, my nominal rental income offset my losses. I made the same amount of money as I would have done on Kiva ($0) but the client paid a substantially lower PAR for the loans. In my opinion that is impressive. It is also disruptive. And it is no surprise that Kiva are furiously trying to copy this model: the genuine P2P model, where funds do not go via a third party.

Another huge assumption I implicitly make here is that Zidisha is scalable. Perhaps they can pull off this feat on low volumes, but when their outstanding portfolio reaches 8-digits their default rates may increase. Or perhaps they will constantly refine their model in the process and defaults will decline. Again, no one knows. Indeed, we do not know the number of borrowers that are suitable for the Zidisha model. Perhaps the supply is very finite? I think the fairest thing we can conclude at this stage is that these are valid questions, the answers to which are pure speculation.

Conclusion

I like Zidisha. I’ve never actually met them face-to-face, but I like their attitude. They are more transparent than most P2Ps (with the exception of MyC4, whom I will discuss in the next post, who define transparency in the P2P space but are fundamentally distinct to Zidisha in that they use the traditional P-2-MFI-P model).

When Kiva panicked at the prospect of engaging with me in a radio debate, Zidisha embraced the dreaded heretic! And they impressed me. I have no axe to grind against the P2P sector, or the microfinance sector in general. I like things that work, I dislike things that don’t work, are fraudulent, deceptive, ineffective or non-transparent. I cannot respond to the critics of Zidisha in any other manner than “this is my experience”. I do not refute their findings. I am not even claiming my experience is typical. If anyone would like my complete transaction history to confirm the calculations I will send it to them (in Excel, no one is getting my Zidisha password!). I might conclude in 6 months that Zidisha is a disaster, particularly if none of my outstanding loans are repaid. I reserve that right. But this is the story to date (data accurate to April 6th 2014), and 18 months is a decent enough trial period.

Zidisha doesn’t merely challenge the P2P sector. It challenges the entire microfinance sector. Intermediating MFIs may not be as useful as we all once thought. Poor Africans might be more trustworthy than we once thought. Perhaps they don’t need (often aggressive) loan officers hassling them to make a repayment, or threats of having their cattle confiscated and being black-listed if they default on a loan. Zidisha provides decent enough data to be able to analyse a portfolio, and even manages to publish the actual interest rates on a loan – a feat that has evaded Kiva to date. Could the data be better? Yes. But let’s be pragmatic – Zidisha depends on a modest donor income and revenue stream from lending traffic. Do we really want them spending millions on hugely detailed data and a rocket-science website? Frankly they exceed the minimum standard I would demand, and are improving weekly. This is not a serious complaint in my opinion.

Obviously I risk falling into one fatal trap here that has plagued the microfinance sector. Repaying a loan does not imply that the loan helped the recipient. I have no idea if my money actually helped these people. Some of the repeat clients claim a previous loan helped them, but I have no way of verifying if this is true. Neither have I any means of verifying that the stated and actual purpose of the loan coincided. But nor do I claim to have “catapulted 40 people out of poverty with $25 a pop”. And nor do Zidisha make such claims.

Versus the traditional P2P model, whereby funds are channelled from lender to platform to MFI to borrower, and back, Zidisha demonstrates an entire link in the chain may be unnecessary – the MFI. This may expose the lender to additional risk (debatably), but it certainly reduces the extraction of wealth from the poor via higher interest rates to finance the intermediating MFIs. MFIs that are often privately-held, shareholder-driven, for-profit institutions. They receive funding from specialised microfinance investment funds, whose own profits depend on passing funds via MFIs – that is their core function. Expect little sympathy for the Zidisha model from either group of players.

In theory Zidisha should not work. But isn’t that what everyone says about disruptive business models? Does Zidisha work? From what I have seen to date, it does a pretty good job, and better than any other platform I know. I also lend on MyC4, and while I can make a few additional percentage points in interest on their platform if I want, the poor pay through the nose as a result of going via an MFI. That’s a topic for another day, but I would advise anyone looking at the P2P space to seriously investigate Zidisha. And the moment I change this advice in this rapidly evolving market, I will post an update accordingly.

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How Can I Invest in Microfinance? Part 1

The question recurs frequently. Well-meaning individuals, and occasionally institutions, contact me asking how they can invest in microfinance. Sometimes they are disillusioned with their existing choice of investment vehicle, other times they are considering microfinance for the first time. Since my recent critical post on Kiva, and their feeble defence, such requests have increased. “If Kiva is flawed, what else can I do?” I need to address this question. But please, this is not formal advice on how to invest, but rather an analysis of the options available.

Essentially there are two types of investors: institutions or individuals. Generally the latter invest smaller amounts than the former. For the purposes of this post, I will focus on individuals wishing to invest in microfinance. I use the term “invest” inter-changeably for debt or equity investments, but in the vast majority of cases the ultimate vehicle is debt-based, i.e. a loan to an intermediary that then lends to the end client. There are essentially 3 main options for individuals:

  1. Invest directly in an MFI – this is the most risky and least diversified method. It is only advisable for individuals with larger sums to invest, excellent knowledge of the MFI, and ideally a local presence. I will not explore this option further, as it is unfeasible for the vast majority of individuals. The exception to this generalisation is to buy shares in a quoted MFI – an option I shall also avoid for the time being.
  2. Invest in a specialised microfinance fund (MIV), which invests in microfinance institutions (MFIs) which lend to the end borrowers. Some of these are retail funds available to individual lenders with modest amounts.
  3. Invest in a so-called P2P platform, which on-lends the funds to the end borrowers, and accept investments as low as $25 or £15.

There may be other categories, but these three represent the majority of options. For this blog series I will not address (1) above, and will reserve (2) merely as a comparison for the focus of these posts – option (3): the P2P lending platforms.

P2P platforms claim to take funds from the ultimate lenders and on-lend them to individual borrowers, thus harnessing the feeling of a bilateral relationship between (multiple) lender(s) and end-borrower(s). Within the P2P category, there are essentially 3 main sub-categories, and I base this categorization on an excellent paper by Iris Ollivault, Markus Grillitsch and Christopher Hoeglinger, who discuss the first two in detail:

  1. Pure P2P lending platforms: these do not pass funds via an MFI, but rather facilitate a direct transaction between lender and borrower. Examples include Zidisha and Kiva Zip. These are basically peer-to-platform-to-peer.
  2. Indirect P2P lending platforms: these are not strictly peer-to-peer, as there is another important stage through which funds travel: they are peer-to-platform-to-MFI-to-peer. Lenders money is channelled through an MFI that manages the client selection, due diligence, disbursement, collection, monitoring and default management of the loan, for which it charges a fee in one form or other. This is the “classic” model. However, within this category there is an important further distinction:
    1. Platforms which enable the lender to charge an interest rate to the ultimate borrower, still going via the MFI. The typical example here is MyC4.
    2. Platforms which do not enable the lender to charge an interest rate to the ultimate borrower, still going via the MFI. The typical example here may be Kiva, Babyloan or LendwithCare, but platforms such as Kubaru also operate on this basis. Interestingly MyC4 is somewhat unique in that it encompasses both models (2A and 2B).
  3. Donation-based P2P lending platforms: the “loan” is essentially a donation to the MFI, with the assurance that the funds are initially on-lent to the stated individual, but repayments to the MFI are converted to a donation for the MFI to use as it pleases (new loans, operating costs etc). The classic example here would be World Vision’s Micro platform.

There are a variety of platforms out there, in each of these categories. What I will attempt to do over the coming weeks is explain the pros and cons of each method, and analyse the main platforms available within each category. This will not be an exhaustive comparison of all such platforms. Finally, once complete, I will summarise which appear to be the best options per category, and compare P2P lending to its most obvious alternative mechanism – investing via a retail microfinance fund.

My analysis begins with the first category, the purest form of P2P lending, and yet in some regards the least well understood. Pure P2Ps.

Pure P2Ps – an introduction

For all the hype surrounding microfinance, and the P2P, or crowd-funding lending methodology in developed as well as developing nations, actual pure P2P lending is rare in the microfinance sector. Call me pedantic, but the very terminology “P2P” suggests to me that there is no more than a facilitator in-between lender and borrower. This is simply not the case in most so-called P2P microfinance lending platforms, where the intermediating MFI plays a huge role in the process, potentially invalidating the very name “P2P”. Doesn’t it annoy you when you take a direct flight only to find it does a stop-over en route, but that didn’t appear on the ticket because you don’t have to actually get off the plane?

Within the “pure P2P” space there are two main players: Kiva Zip, and Zidisha. The former has only recently progressed from beta to alpha stage, and lends only in Kenya and the US currently. My views on Kiva, its transparency, operating efficiency and choice of partners are well documented and not entirely positive. Instead I will focus initially on Zidisha – the first genuine microfinance P2P lending platform, with a multi-country focus.

Julia Kurnia founded Zidisha following a disappointing realisation that the operating costs of traditional microfinance lending, via a local MFI, required the interest rates charged to the end borrower to rise substantially. In her own words:

“In order to manage the loans we opened an office [in Senegal], hired a loan officer – and saw our overhead costs shoot up to more than a third of the value of the loans we were making. The interest we would have had to charge to cover our costs was high enough to wipe out the borrowers’ profits, defeating the purpose entirely.”

It sounds so obvious, and yet it is a point many have failed to grasp in the microfinance sector. Such people assume the poor are somehow indifferent, or immune to often extortionate interest rates. They believe microfinance is so miraculous that even APRs of 200% are fine. I disagree with them, and so, presumably, do Zidisha.

Kurnia decided to harness the power of the internet, and the increasing prevalence of internet accessibility in developing countries, to bypass the MFIs altogether. Thus Zidisha was born.

Zidisha offers loans in Senegal, Kenya, Ghana and Burkina Faso, and to a lesser extent in Zambia, Niger, Indonesia, Guinea and Benin. It has lent approximately $2m in total in 6000 loans to about 5000 end clients (i.e. some repeat borrowers), with a little under 8000 lenders. According to their statistics page (April 17th) they suggest the typical lender charges about 5.26%; that three quarters of those loans that should have been repaid by now have in fact been repaid. Of those that have not been repaid (25%), about 5% are late but not in default, 1% have been forgiven, and 19% have been written-off.

Three observations here are important to note. Firstly, these are cumulative statistics from the inception of the company, and secondly that repayment rates have improved recently. However, it has to be stated that these statistics are nowhere near as impressive as those boasted by other P2Ps. Kiva current suggests its repayment rate is 98.93%. The extent to which this figure is true has been questioned, however. Recent criticism of Zidisha has suggested their repayment rate is low enough to render the model ineffective. This brings me to my third observation: this is not the experience I have had with Zidisha. I therefore use my own real, personally verified data to analyse what happened with my loans on Zidisha, in the following post:

How can I invest in microfinance – part 2: my Zidisha experience

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Incestuous Relationships, Spin & PR in Microfinance

My friend Beth Rhyne (of Smart, CFI and Accion) recently posted a bizarre article on the CFI blog (i.e. on her blog) in which she pleads for money. The premise is that the infrastructure of the microfinance sector, by which she refers to her own institution and those of her buddies, needs fixing. Some might suggest replacing entirely. She doesn’t really state why they are apparently broken, but the bottom line is that she wants money. The club includes the Social Performance Taskforce (SPTF), Smart Campaign, MixMarket, four rating agencies, and she later clips on Truelift. She then further adds the Progress out of Poverty Index (PPI), which is a toolkit rather than a company, but one promoted by her friends at Grameen Foundation USA (GFUSA).

The source of the problem, according to Rhyne, is that the public sector is no longer willing to fund such entities. Private investors are reluctant to stump up the cash. And the microfinance institutions (MFIs) themselves don’t want to pay for their services. This certainly explains why she’s coming cap-in-hand for money. However, there is a possibly simpler explanation for why the public sector, private sector and clients don’t support or want to pay for a product: perhaps it’s not a very good product? MFTransparency does provide a useful function; the PPI is not a product, but a concept; and the rating agencies are generally competent. But in the case of the SPTF, Smart and Truelift there is a very real possibility that “ineffective, unwanted product” could be the cause of this problem.

Indeed, one could wonder why these institutions don’t simply merge into one massive entity for all the cross-relationships there are, they could probably save some operating expenses in the process. I get so confused with the incestuous relationships between them that I spent a few minutes on their various websites looking for their various partners, steering committee members, directors, advisors etc. See if you can spot the pattern:

Smart (also known as Crafty): Accion in various guises, including basically owning Smart, housing it, directing it etc; Larry Reed of the Microcredit Summit Campaign; Beth Rhyne herself (Accion); Finca; Anne Hastings of the CEO Working Group; Asad Mahmood of Deutsche bank (although he recently quit); Credit Suisse; Ford Foundation; Mastercard; SPTF.

The CEO Working Group: Accion; Finca; Freedom from Hunger; GFUSA; Opportunity Int’l; ProMujer; Vision Fund International (VFI); Women’s World Bank (WWB).

The Summit Campaign: Larry Reed is the director, and former CEO of Opportunity Int’l; Bergeron is from Truelift/Smart, and ex-Kiva; Yunus; Hatch (of Finca); another Truelift bod; Citibank; Freedom from Hunger; GFUSA.

MixMarket: Citibank, CGAP and Mastercard.

Social Performance taskforce (SPTF): Ford Foundation; CGAP; Grameen; Ann Hastings (CEO Working Group); MixMarket.

MFTransparency (the only credible member here): various rating agencies; MixMarket; Smart; SPTF; Mastercard; Citibank; Ford Foundation; Deutsche Bank.

Truelift (the least credible member here): Isabelle Barres (of Accion and Smart); Alex Counts (GFUSA, CEO Working Group); Ford Foundation; SPTF; Anne Hastings (CEO Working Group); Deutsche Bank; Larry Reed (of Microcredit Summit Campaign); Premal Shah of Kiva (advisor!); Emmanuelle Javoy (ex-Planet Rating); Sam Daley-Harris (ex-Microcredit Summit Campaign); Susy Cheston (Accion); CEO of MixMarket; Freedom from Hunger.

Am I the only one to notice some similarities in these various entities? They seem to all be sitting on each other’s boards, advising one another, funding one another, hiring one another, promoting one another’s activities, and generally scrubbing one another’s backs, no?

In one of those rare occasions when I actually agree with Rhyne, she distinguishes between first generation entities (MixMarket and the ratings agencies) and second generation (the rest). The MixMarket is not the most user-friendly or accurate database in the world, but actually it’s a decent enough resource which I use and am grateful for. I praise the rating agencies extensively in my book, and let’s not forget that the recent collapse of (Accion’s investment) MiBanco in Peru was first called by Fitch Ratings last year.

I also respect MFTransparency, who publish the real APRs that these MFIs are charging the poor, data which I use to annoy the likes of Opportunity Int;l who don’t like people talking about their 150% APRs, or to demonstrate why Kiva’s estimate of interest rates is so poor. I wish this data could actually get into the hands of those that need it – the poor – but this gripe aside MFT is a valuable addition to the sector and I sincerely hope someone, public or private, finances it.

It’s the other three that are a nuisance. They do almost nothing; off-record most people don’t take them that seriously, everyone knows it is largely window-dressing to maintain the reputation of the sector; and actual client protection comes a distant second when it comes to maintaining these institutions. Note that nowhere in the article does Rhyne state that some actual harm could come to the end-clients (i.e. the poor) as a result of this “existential threat” to these companies struggling to make ends meet. The poor aren’t mentioned in the article, which raises the question, why is this a problem at all? The clue comes later:

  • “Because international investors are putting money into microfinance at an unflagging rate” i.e. we need to keep the money rolling into the sector.
  • “Because global bodies are important for keeping standards high everywhere and pointing the way for national initiatives” – and this is what we’ve come up after 30 years of microfinance activities – Smart and Truelift, the latter occasionally confused for a Wonderbra?
  • “These bodies are important because they shape a global identity for microfinance which is essential for preserving the social character of the industry – exactly! Maintain outward appearances – Beth and I agree on a second point at least!

So, last night I was checking my Twitter feed and a strange person I had never come across (microfinance is a small sect – you get to know the usual suspects pretty quickly) posted some mysterious comments about Smart Campaign and how wonderful it was. The Twitter handle is @AndrewSprung, and sure enough, he runs a PR company, called SprungPR. Click on the case studies and who crops up on the client list? Accion. Wow, what a small world it is! And look at what the case study boasts:

“Our work has yielded in-depth coverage and interviews with firm leaders in publications including The New York Times, Financial Times, Wall Street Journal, Globe & Mail, Time, Economist, BusinessWeek, Forbes, and Fast Company. Recently, as Accion has taken major equity stakes or wholly financed new microfinance ventures in Asia, Africa and Latin America,  these initiatives have been covered in outlets including Dow Jones,People’s Daily and China Daily, Forbes.com, The Washington Post, The Deal, PE Hub, VCCircle,Telecompaper, ITWeb, and BNAmericas. We have also enhanced Accion’s thought leadership by placing bylines in publications including New York Times Dealbook, Forbes.com, Marketwatch, andAmerican Banker, as well as letters in The New York Times, Boston Globe, and BusinessWeek (see examples on the bylined articles page). In addition, we have helped with the development and promotion through social media of a regular Huffington Post column by Elisabeth Rhyne, director of Accion’s Center for Financial Inclusion. More broadly, we have helped Accion engage with the microfinance and development community and interested journalists on Twitter and in other social media.”

So, while Rhyne is going round asking for money, it appears they have enough to employ the services of a PR company. Given that Smart is Accion, this was hardly difficult. So, expect a series of placements in mainstream media about the joys of these initiatives, not because some bright journalist has decided to write about them, but because a de facto lobbyist has campaigned on their behalf. Isn’t it a bit odd that such bodies even need a PR company?

Some may remember a similar case some years ago, when Friends of Grameen employed none other than Burson-Marsteller in response to Tom Heinemann’s controversial documentary about Yunus and Grameen Bank. They engaged in a flawed smear campaign against Heinemann, which should come as little surprise. Burson-Marsteller’s previous clients include Union Carbide, Philip Morris, Blackwater, Nicolae Ceausescu, and Pinochet himself. They did the smear campaign for Facebook against Google, and Rachel Maddow of MSNBC famously commented “When Evil needs public relations, Evil has Burson-Marsteller on speed-dial”. Again, isn’t it strange that Friends of Grameen would need these guys?

And in yet another ironic twist, in my recent critical post against the CEO of microfinance investment fund Incofin I sniffed around the guy who had originally Tweeted the link to this ridiculous interview. The vociferous Tweeter (16,300 to date) named Michiel Sallaets is none other than Communications Manager at Incofin, and according to his bio on the Incofin website, take a wild guess where he worked previously? Burson-Marsteller. It seems the company that boasted Pinochet and the Argentine military junta amongst its clients is now actively working in the microfinance sector.

Anyway, what can we conclude from all this?

  • Do not trust the likes of Truelift and Smart as far as you can throw them, these are meaningless spin organisations.
  • Be worried about any such initiatives that rely on dodgy PR companies.
  • Be aware of smear campaigns, planted articles, dubious media coverage and questionable “research papers” or “interviews”. Investigate carefully the content and background of each.
  • Note (with fear) that despite appearances, microfinance is almost entirely unregulated. Hopefully one day someone will address this sensibly.
  • MFIs: ignore these institutions, don’t waste your money on their certifications or silver stars or whatever else they offer, but do submit your data to MixMarket, to MFTransparency, and get independent ratings.
  • Rating agencies: don’t sell out and start offering pathetic certifications – doing so will undermine your otherwise good work.
  • Investors (public and private): don’t put a dime into these organisations, but also do not take any faith in their medals and promises and certifications – there is no substitute for a decent due diligence. If a credible and independent regulator does come along, finance it, but check the people running it first. Support MFTransparency and the independent rating agencies, and consider making both a condition for investing in an MFI.

Gargamel

We do need to clean up the microfinance sector. That is beyond doubt, but the current offering is inadequate. If we want to rely on so-called self-regulatory bodies, they must be genuinely objective and independent of the people they are meant to be regulating. The current situation is as farcical as putting Goldman Sachs in charge of the SEC. Or perhaps it’s more like putting Gargamel in charge of the Smurfs?

 

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Spincofin – a Flawed Interview with the CEO of Incofin

There was a lovely article published recently. Concise, and in a single question one can see the fundamental flaws in the presentation of microfinance. BxLConnect interviewed Loïc De Cannière, CEO of microfinance investment fund Incofin. One question from the article is worth examining closely:

Q. Are there any studies on the success rates and effectiveness of microfinance?

A. It is difficult to measure the impact of microfinance in a scientific way because we have no way of knowing what the situation in these communities would have been if microfinancing would have not taken place. However, there are certain cases that clearly show how it can be effective. For example, we have one story of a Kenyan woman who started selling textile in small markets in Nairobi. Through microfinance loans, she grew into a large company and now frequently travels to Dubai to buy and trade in large quantities. In the end, I think the numbers speak for themselves. We invest in 120 microfinance institutions around the world that in turn have made almost 7.5 million loans. Only 1% of those loans have defaulted, which is remarkable and even lower compared to bank loans in western countries.

It’s a valid question and the response of Incofin’s CEO is fascinating. Firstly, he doesn’t actually answer this rather straightforward question (“are there any studies…?”). His argument suggests that the difficulty in measuring impact arises from the inability to know what would have happened had the client not obtained a loan. This ignores a massive array of academic papers that address this specific question, using random controlled trials (RCTs). Such research methods specifically attempt to tease out answers to such questions, by creating control groups, similar to the medical research. RCTs are not perfect, and in fact no trial can ever be perfect, but they have made very convincing progress in addressing this topic. In one single sentence Cannière manages to dismiss the entire academic literature on microfinance impact assessment, and yet remain optimistic about microfinance.

Consider the similarities with the medical profession. When testing a new drug, they apply it to some subjects and not to others, to see how the drug impacts the former compared to the latter. There is no way to also see, on any single subject, what would have happened if they had received the alternative treatment. Thankfully the medical profession has not discarded the practice of drug testing, while Mr. Cannière simply disregards such practices in microfinance. Perhaps we should be pleased that he is running a microfinance fund and not a drug-manufacturer.

Secondly, despite disregarding the academic literature to date, he states that “there are certain cases that clearly show how [microfinance] can be effective”, and then proceeds to tell us about “one story” in Kenya. So, when asked a question explicitly about the broad nature of an entire sector, his defence rests on a single case. To illustrate this clearly, it is like asking a national lottery operator “what is the impact of national lotteries upon the general public” and the response being: “overwhelmingly positive, for example, Mr. Smith won $1 million last week”. Technically true, but what about the other million people who bought a lottery ticket and did not win? A detail the CEO of Incofin conveniently ignores. And there have been countless studies of microfinance actually hurting clients, forcing them to suicide, the microfinance sectors of entire countries collapsing, chronic over-indebtedness etc. and yet Mr. Cannière fails to mention these. This is a standard defence of microfinance: slap a few success stories, ideally with pictures of African women standing next to a goat or a sewing machine, and present this as the norm. Look at any microfinance website for evidence of such practices.

Thirdly, his final comment perhaps best summarises the fallacy of logic that such people depend on:

We invest in 120 microfinance institutions around the world that in turn have made almost 7.5 million loans. Only 1% of those loans have defaulted, which is remarkable and even lower compared to bank loans in western countries.

The low default rates are used as proof that microfinance works. This is one of the classic defences. But loan repayment does not translate to benefit to the client. The evil moneylenders, who break legs and threaten innocent clients, are the bogeyman of microfinance, and also have decent repayment rates. The fact that someone repays a loan says absolutely nothing about the impact of that loan. Indeed, one could argue that the benefit to a client who receives $1.000 and never repays a single dollar and discreetly vanishes could actually be far greater than that of a client who struggles to repay every last cent. In countries such as Nicaragua, where over-indebtedness led to a nationwide collapse, the poor managed to repay loans with very high success rates. They would borrow from Bank A to repay Bank B, and then from Bank C to repay Bank A. While this merry-go round continues repayment rates are healthy, portfolios grow, paper-profit accrues to the banks and their investors, and everything looks fine. Until the music stops, as it did rather abruptly in Nicaragua. Thus even repeat loans to seemingly “loyal” clients could as easily be a sign of damage as a sign of success.

In short, this was a fair journalistic question with a deeply flawed answer. Why do I pick up on this? Because in different guises this is the standard problem in reporting on microfinance. It is pure spin but superficially looks credible, which is what makes it so dangerous. Now, there are only two obvious conclusions I can arrive at regarding this CEO:

  1. He actually believes his own rhetoric
  2. He knows this is a flawed response, but said it anyway

Which of these is worse? I am not sure. But the conclusion is the same. This is a deliberate attempt to paint microfinance in a rosy light and ignore the mounting wealth of evidence that challenges the wisdom of indebting poor people. It risks deceiving naïve and well-meaning investors, and it risks harming the lives of the poor. Such companies ought not be allowed to take funds from the general public and institutional investors on the basis of such spin. They should be grilled by astute journalists who push for the real answers rather than settle for meaningless patter in what amounts to little more than a glorified PR exercise thinly disguised as “knowledge”. Such an attitude would be fatal in the medical profession. In the meantime they undermine the efforts of those who are actually trying to harness financial services for the benefit of the poor, who are painted with the same brush as this rhetoric. I find this a great pity.

The rest of the interview is similarly flawed. Cannière states interest rates are typically 20-25% per year, while the Economist recently claimed they were 35% per year (which still appears an under-estimate to me). Alas the rest of the interview subsequently deteriorates into a vain PR exercise.

The underlying problem illustrated clearly here is the so-called principal-agent problem. Microfinance investors must entrust their funds to an intermediary, such as Incofin, to invest on their behalf. Will such intermediaries act in the best interests of the poor, of their investors, or in their own best interests? This is ultimately a question of alignment of interests, and the trustworthiness of the intermediating agent. Do the responses to these simple questions inspire confidence in Incofin? That is for the reader to decide.

In the meantime, don’t believe everything you read in the media.

 

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Too Big to Fail (Just Got Bigger)

Credicorp bought MiBanco for $179m. According to the stated equity on the MixMarket, this would suggest they paid 1.25x the net equity of the bank, for a 61% stake. This is a low price compared to most microfinance transactions, but let’s face it, it wasn’t Peru’s best bank. The owner already has the second biggest microfinance bank in Peru (by number of clients), Edyficar, thus the combined bank is a monster – a fifth of the entire sector. If this was too big to fail before, it’s just got bigger. And of course, while the initial fears over the fate of MiBanco have momentarily subsided, the underlying problems remain identical to last week. Over-indebtedness is still a problem, MiBanco has a poor quality portfolio and is bleeding clients. Shifting shareholders doesn’t change that. Indeed, some might argue that paying any premium over book value for this bank was generous. Obviously Grupo ACP are out of the hole for a while, flush with cash, and there is no danger of defaulting on the bond now.

They’ve sold off the family silver, however. An undignified outcome for both ACP and MiBanco without the underlying problem solved – little to celebrate.

And technically speaking the deal has not yet been approved. Indeed, one might suspect that political manoeuvrings behind the scenes got the deal on the table in the first place, so it is unlikely it will fall at the final hurdle.

Needless to say ACP had another spin on this. This was not a firesale apparently, but part of a cunning plan: “We do also believe that the main goal that motivated us for 45 years has been accomplished.” It is probably true that they set out to financialize the poor of Peru, and have played a stellar role in that process for better or for worse. They have left a mature microfinance sector in their wake. Perhaps too mature? But the reality is that this was a firesale prompted by a looming default on a bond due to declining earnings in their rather undiversified portfolio in a country that looks worryingly over-indebted. I doubt this was the plan hatched nearly half a century ago.

An interesting article appeared in the Peruvian press. Those bright journalists dug up all the data on ACPs other investments, and ACP really had nothing else they could sell:

Semana Economica ACP holdings

There were a couple of marginally profitable Peruvian assets, and they had already flogged the Bolivian bank (once again, all part of the plan apparently). To raise the sums ACP required, trying to sell a loss-making Mexican asset in a hurry was hardly ideal. They had no option, but don’t kid yourself – there was nothing either clever or strategic about this deal, their back was against the wall because they had over-leveraged themselves. Ring any bells?

But the Semana Económica article points out some other fascinating items:

  • Obtaining an equity injection from the other investors, such as Triodos was not possible as these minority shareholders were none too impressed with ACP.
  • ACP had previously tried to raise equity capital in Luxembourg, but had been unable to due to its legal structure as an NGO.
  • The relationship between ACP, MiBanco and Credicorp has a history. In 2011 Credicorp had tried to buy MiBanco from ACP. When Edyficar was up for sale, ACP tried to buy it. So, finally the family is reunited.
  • The article estimates the value of MiBanco as of the end of 2013 at US$311. The actual deal was $179m to buy 61% of the bank, suggesting the total value (i.e. 100%) of the bank to be about $295m, so a little lower than their valuation. But in fact this valuation is 37% below what the bank was worth in 2007, according to the article. So, since 2007 the management team actually did quite a spectacular job of destroying value for MiBanco’s shareholders. ACP clearly suffered as a result of this, but microfinance investor Triodos are unlikely to be too pleased about this erosion of value at one of their principal investments. Remember also that in 2013 the equity on the balance sheet of MiBanco fell by 7% alone. Triodos will have to explain this rather awkward result to its own Dutch investors, and while this was not Triodos’s fault necessarily, that doesn’t make the case any easier to justify.

What is interesting here is that in fact Credicorp paid relatively little for MiBanco. The once heralded star of Latin American microfinance was sold for a song. (For readers that are not familiar with equity valuation, skip this section). Basically the bank was sold at 1.25x book value, based on the relatively limited data available on Mix. This is at the very lowest end of the 1.3x to 1.9x range suggested by CGAP as the usual pricing. Presumably this incorporates Credicorp’s discount applied to compensate for restructuring costs, write-offs, integration expenses and redundancy payments. To put this in context, Credicorp paid a 25% premium over the book value of MiBanco in 2014. When Credicorp bought Edyficar in 2009 they paid a premium of 150% over book value. This was a firesale.

So, what is Credicorp going to do? First of all, it will probably find that half the clients of MiBanco are their clients already, which will be a little worrying. Paying off your loan at Bank A with a loan from Bank B is one thing, but they are now the same bank.

They will presumably cut a significant portion of the headcount, at all levels of the bank. It will be astonishing if any of the senior management team at MiBanco are allowed to stay on, but friendships run deep in these banks, and likely the main lay-offs will be the junior staff, but we shall see. You don’t need two CEOs, and right now it is pretty clear which one is doing a better job. Redundancy costs will be high in Peru.

Another pertinent question is whether the newly formed entity will operate under the Edyficar brand, or MiBanco’s, or remain separate. Edyficar is a solid, well-run bank and seems the obvious choice, but common sense should not be taken for granted in this sector – MiBanco is bigger and has a stronger brand name, so maybe that is perceived as better?

Edyficar is in far better shape than MiBanco. According to the MixMarket its return on assets is 4.23%, return on equity is 40.95%. MiBanco wrote off approximately 5% of its portfolio in each of the last two years, while Edyficar wrote off a mere 2.22% in 2012 (2013 data not available). Only 4.38% of Edyficar’s clients are overdue on loan repayments by more than 30 days, and 3.16% at 90 days – a little over half the levels reported by MiBanco.

The deal may provide some respite to ACP, but there are two major problems that have not vanished. They are exactly the same as before this crisis struck Grupo ACP. Over-indebtedness is high, and MiBanco’s non-performing loans are high. Its clients are not repaying their loans. Just because the shareholder abruptly changed will not change that. Compared to MiBanco, Edyficar is well-run, its portfolio is notably better quality, with fewer write-offs. Merging the portfolio of MiBanco is going to deteriorate the overall picture. And it seems unusual to suppose that Credicorp bought MiBanco in order to slow down lending, in all likelihood it will clean up the mess and ramp up the growth once again. Whatever the strategy is, do we expect the merged company will somehow try to manage, or even reduce, over-indebtedness? And now Peru is debatably even less prepared for a systemic crisis in the microfinance sector. A collapse of MiBanco could have triggered a broader collapse across the sector, and now the MiBanco/Edyficar union is even bigger. Too big to fail?

Frankly, anyone thinking this problem is over is deluded. This might be just the beginning.

So, is there a crisis looming? I don’t know. Many ingredients for a storm are present while others are notably absent, as I blogged previously. All it would take is a spark, as in previous crises, often from unexpected sources. There are certainly warning signs, but hopefully this “incident” will send a valuable warning signal to the sector, and in particular to the regulator, that they need to do something. What could this be? I reckon there are a few key steps here that would reduce the chance of the situation deteriorating.

  1. The regulator needs to take pro-active steps to reassure the Peruvian microfinance sector and the international investing community that it is in control, aware of the problems, willing to take action if the situation deteriorates, and is credibly run. It has mud on its face that it permitted this recent debacle to occur in the first place, but no point crying over spilt milk, it needs to look forwards and with confidence.
  2. A possible step, taking a leaf out of Bolivia, Ecuador and Colombia’s books, would be to declare an interest rate cap. This essentially stops poor people being exploited. Interest rates are not that high in Peru in general but there are outliers, charging up to 200% in cases. Get these out. Placing a cap at 50% will have minimal impact on the vast majority of the sector. The banks that really cannot survive without charging rates of 200% – does Peru need them anyway? This would take a little steam out of the sector (not a lot: such loans are thankfully rare), but it would reinforce the signal to the market: “we are not messing about, 50% isn’t so bad, those Ecuadorians are on 30%, step in line as we could always reduce this again”. It’s a warning shot. The free-market fanatics will complain that it is anti-free-market, and also anti their bonuses. Ignore them, a 50% cap is fine.
  3. Insert a minor tax on capital departing the country, perhaps 1% (Ecuador is at 5%). This prevents short-term speculative funds bidding up the sector too rapidly. Again, the idea is to take a little steam out, but on the investing side, and also to send a warning shot. This will not create a panic, but it will have an impact at the margin, and a psychological effect. Plus this would generate tax revenue for the Peruvian government to ideally do something useful with. An alternative to this is to place some sort of minimum capital requirement at the banks.
  4. The regulator didn’t intervene soon enough in the case of MiBanco, and now it has an even bigger beast to manage, and more people watching it, so it should keep an extremely close eye on this merger, and not hesitate to intervene at the first sign of trouble. Something going wrong at a bank that controls 20% of the sector is never pretty.
  5. The regulator may wish to extend its oversight to the shareholders of their banks. How many others are as wobbly as MiBanco? The unusual element in this case was that it was triggered not by the bank itself, but by its main shareholder. So, keep an eye on the shareholders. I have no idea if the regulator was doing this previously – if so it wasn’t doing it very well. If not, now might be a good opportunity to start.
  6. Tighten client protection rules. I am not sure what sort of ombudsman there is in the country, but the last thing the regulator wants is civil unrest against the banks. If there is animosity against banks amongst over-indebted borrowers there ought be a formal channel they can vent their frustration through, and that will offer some form of bankruptcy protection to the poor and rigorous deposit insurance. This might sound overly interventionist, but bear in mind most “developed” countries have precisely this sort of provision, and one need look no further than Nicaragua to see what happens when the borrowers take matters into their own hands. Plus, again, this is wise signalling. Not just to the banks and their investors, but also to the borrowers.
  7. Tighten the rules for measuring clients’ borrowing ability. Indeed, the regulator could limit the number of loans a client may have simultaneously. When a client is managing more than five loans simultaneously one has to wonder if this is healthy. Plus it would force clients to think carefully about who they borrow from, essentially using up one of their five “permits” each time, rather than walking onto any street corner in Peru and getting a loan over the counter.

There will be a continued “period of consolidation” in the sector. This is investor-talk for a period of collapses, with a nice spin applied. This is not necessarily a bad thing, but it has to be managed in a controlled way. A string of collapses is never nice, better to anticipate this and wind them down slowly. A bit like demolishing a building.

The banks need to calm down the relentless competitiveness and desire to perpetually steal one another’s clients, constantly rise in the ranking tables and retain market share. In the short-run such behaviour may produce results, in the long run it is cannibalism and leads to over-indebtedness and possible crisis. Is it too much to ask that they collaborate somehow? Fierce competition is so engrained in the Peruvian microfinance sector (for better and for worse) that this will be a hard cultural shift to initiate. External prompting from the regulator will be required, but soft intervention can also work. Ideally this would also come from the investors, who may have the prudence to suggest that a healthy 10% growth rate is preferable to a 30% dash towards an imaginary finish line. But here I am entering into the role of pure fantasy, the odds of investors with the whiff of profit in their nostrils turning down a quick buck is not the most likely outcome highlighted here.

The fact that the Economist Intelligence Unit declared, for the sixth year in a row, that Peru is the best regulated microfinance country on Earth suggests at least one word in their name might not be entirely valid. Any false confidence this imparts upon the regulator should be re-assessed in light of this recent mess.

But there is no crisis yet. There is time to fix this. It is not too late. But the warning signs are clearly visible, the fact that the entire sector hasn’t collapsed does not imply the warning signs should be ignored. Alas the global microfinance sector has established an incredible tendency to ignore such warnings and wonder aimlessly off cliffs. But this is neither inevitable nor unavoidable.

There are no doubt 100 other measures that the regulator is looking into currently that I am unaware of, and I sincerely hope they can act wisely in the best interests not only of investors but also of the Peruvian public. The trick is confidence. The SBS should activate all the tools at its disposal to fine-tune the sector – no brash moves that could trigger a crisis/exodus/bankruptcy etc. Subtle moves that restore confidence and protect not only the banks, and their investors, but also the poor.

Too much to hope for? Yes, probably.

 

Correction to previous post: Accion had already been flogged to Bamboo some years ago. Thanks to an anonymous reader for the correction.

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Brief Analysis of MiBanco

Introduction

It seemed appropriate to take a closer look at the bank in the centre of the emerging “incident” in Peru’s beloved microfinance sector. In a later post I may do a comparison of MiBanco to other banks in the sector, but for now I shall focus only on the data presented in the MixMarket. I examined data for the years 2011 and 2012, and the quarterly data to the end of 2013 (i.e. 4th quarter – the most recent, but incomplete data available. Select 2010 for “Start Year” and click all boxes for “Report Type”. Mix data is self-reported and not always entirely reliable, but it’s the best we’ve got).

I must stress here that this analysis is entirely from publicly available information. The results are disturbing. I’ll go through this broadly in the order that the data appears on the Mix.

The Mix Data

  • The number of offices has barely changed, from 117 to 119 in two years.
  • Leverage (the amount of debt compared to the amount of equity) has increased from 7.5 to 8.1 (2011 to 2013), suggesting MiBanco may struggle to raise additional debt capital. This is not chronically high, but particularly in the circumstances it may struggle to extend this further.
  • What is far more worrying is the decline in the number of active borrowers. This is worse than I had previously suggested. From the end of 2012 to Q4 2013 borrowers fell from 505,000 to 364,000, a decline of over 140,000 in a single year, or nearly 30%. The number of loans outstanding fell even further, from 565,000 to 369,000, a decline of 35% in a single year. The gross loan portfolio fell by less (from $1.86 billion to $1.60 billion, as mentioned previously), which is a fall of 14%. The reason why the portfolio fell by less than the client numbers is that MiBanco offered larger loans to its clients.
  • The average outstanding loan balance increased from $3,284 to $4,325 from 2012 to 2013. This is quite a notable shift in focus – some may call this mission drift, but we would need to examine the components of the portfolio in more detail to conclude this. The average outstanding loan balance increased by 31.7% in 2013 and by 7% in 2012.
  • Looking at the other side of the balance sheet, the number of deposit accounts actually increased dramatically from 2012 to 2013. However, the average deposit account balance fell almost as dramatically, from $3,759 to $836. More people saving less, in a nutshell. The combined effect of this was a 1.7% decline in the total deposits held by MiBanco. However, this should not be underestimated – MiBanco currently holds over $1.4 billion of client deposits, thus a run on the bank would be extremely serious were Peruvians to lose faith in its integrity. This is cause for concern for the regulator – a run on a small Edpyme is not too serious, a run on MiBanco would be dangerous.
  • As mentioned previously, profits have plunged. The profit margin was a healthy 12.6% in 2011. By 2012 it had fallen to 2.2%. Of course, this led to reduced dividend payments to the shareholders, which contributed to nudging Grupo ACP into technical default of its loans (the Fitch downgrade occurred this same year). The contagion spread from MiBanco to ACP – this is a critical point to grasp.
  • The other expense ratios actually remained relatively healthy – operating expenses as a percentage of loan portfolio (i.e. how much it cost to lend $1) rose marginally from 11.9% to 12.1%, but this is within normal boundaries. The bank is quite efficiently run, operationally, although for a bank of this size perhaps greater economies of scale might be expected. I would need to compare MiBanco to its peers to confirm this.
  • Interestingly the number of clients per loan officer or staff member also declined, driven by the fall in the number of clients, but not by a significant amount. This is because MiBanco laid-off substantial staff during the last year. Personnel fell from 4,419 to 3,847 in a single year: 572 lay-offs, or 13% of the workforce. Alas personnel expenses are not reported for 2012 or 2013, but in 2011 they stood at $95 million, i.e. a substantial expense, which has presumably declined. Redundancy payments are alas not reported on the Mix, but in Peru these are likely to have been quite high (and not over yet!).
  • I previously mentioned the declining portfolio quality, but I failed to pick up the write-off ratio. This is the amount of the portfolio a bank simply deems uncollectable, and removes from the balance sheet as an expense. Naturally, when portfolio is removed from the portfolio (the “bad loans”), the remaining loans appear better quality. What we see in MiBanco’s case is quite shocking. In 2011 the bank wrote of 5.4% of its portfolio, and an additional 4.6% iMiBanco head officen 2012. And yet (presumably to the grave disappointment of management) the non-performing portfolio remains at alarmingly high levels by the end of 2013 (7.8% delinquent for over 30 days, and 5.8% at 90 days) despite this purging of the bad loans. So far, according to the Mix data, there have not been any write-offs in 2013, but these are quarterly accounts, we should wait for the annual accounts to verify this. Do not underestimate how serious this is. Later on in the report the amounts are published: MiBanco wrote-off $76 million in 2011 and an additional $78 million in 2012. Write-offs therefore cost the bank of the same order of magnitude as its staff costs. This is chronic. And do not forget that each of these written-off clients represents a poor Peruvian who was unable to repay a loan, essentially went bankrupt, and will have presumably been reported to the credit bureau and is now black-listed. These are not merely numbers but people. All too easily we forget this, particularly from the lovely, air-conditioned head office!
  • The impairment loss allowance for 2013 is $117 million. Again, a significant amount.
  • Total liabilities over the period increased by 14.5% from 2011 to 2012, as MiBanco took on more debt ($143,617,700 more to be precise). But liabilities actually declined marginally (by 1.5%) in 2013. However, currently liabilities are $1.9 billion. Think about this for a moment – MiBanco owes more money than its entire loan portfolio is worth. Does that sound healthy? Admittedly the majority of this is the deposit balances of the clients, but “borrowing”, which I assume is external debt, is a whopping $382 million ($13 million more than in 2012). With this structure of the balance sheet, and the increased leverage mentioned previously, one wonders if MiBanco can easily raise additional borrowings currently. And indeed, what happens when lenders start refusing to roll-over or make new loans, as BlueOrchard did? Things could get uncomfortable for MiBanco – the most obvious way it can repay this debt is by winding down its portfolio, i.e. shrinking, which is what we have seen quite obviously in 2013. Thus as ACP flogs its assets to pay its loans, is MiBanco essentially doing the same? If MiBanco refuses to extend loans to well-repaying clients, they will simply leave and take their savings with them, further worsening the problem. It is a slippery slope.
  • And then we have the all-important equity, the single item that keeps the shareholders excited. This fell by $17.4 million in 2013, or 6.9%. Although this is unlikely to please the shareholders, MiBanco does still retain a healthy equity cushion of $234 million, so collapse is not imminent. But the board of directors, and the shareholders, will presumably want a decent explanation of why senior management wiped off nearly 7% of the equity in a single year in a country that is apparently the best in the world for microfinance.
  • Fees and interest paid by the clients amounted to $380 million in 2011, and rose to just below $400 million by 2012. Unfortunately 2013 data is not reported. Although the portfolio declined substantially in 2013, the average portfolio in 2013 was not significantly different to the average in 2012, so gross income could be of a similar order of magnitude. We await the annual accounts to verify this. While this may sound like a lot of money extracted from the pockets of poor Peruvians, it is not all profit, as the lion’s share goes to covering the operating expenses ($205 million in 2012, a 23% increase from 2011, 2013 not reported yet). But MiBanco also pays interest, and in 2012 its own financing expenses rose to over $80 million, to both depositors (who earn interest) and to external lenders such as the microfinance funds. But, to present a single rather worrying trend, net operating income in 2011 was $48,471,636. This fell an impressive 82% to a mere $8,620,165 a year later, and things appear to have worsened since.
  • Alas the lack of complete 2013 data makes more observations impossible. The rest of the data presented is of mild interest. From zero female members on their board this fortunately increased to 1 in 2012 (with 11 men). Women account for a little over one third of managers and staff, and marginally over half the clients. Call me biased, but perhaps a few more women running this bank not be a bad idea!

Conclusion

While it is true to say that the current problem was sparked not by MiBanco but by its main shareholder, who is clearly not doing very well, MiBanco is far from healthy. Would you buy shares in this company? Would you lend them money? Would you entrust your savings to them? This is not a backward country without regulations run by cowboys, this is the best country on Earth for microfinance according to the Economist Intelligence Unit. This is not some struggling NGO with a few thousand clients – this is one of the largest MFIs on Earth. Problems with the portfolio are not minor – it wrote-off 1 in 20 loans in both 2011 and 2012, before the current problems emerged. 140,000 active borrowers left the bank in 2013 alone, and even more than this if you consider number of loans rather than number of people. By the end of 2013 1 in every 13 clients was in default over 30 days. 1 in 17 hadn’t made a payment for three months. This is a terrible situation.

The only thing I can suggest here is a change of management. This is not a game – if MiBanco goes down, it will take a lot of people down with it, most of whom are largely innocent. The main shareholder is sufficiently reckless to land itself in default on a senior bond, so there is not much hope there. This is not a country such as Greece suffering major structural problems, Peru grew 6.3% in 2012. Triodos and the IFC may be slightly more prudent, but they have minority stakes. In my personal opinion Grupo ACP has a lot of answering to do, and flogging a few marginal assets in Bolivia or El Salvador to keep its bondholders happy is not enough to resolve the underlying problem.

As we have seen in the recent financial crisis, mis-management in large financial institutions can have a catastrophic impact on entire societies, and I must beg to disagree with the Economist Intelligence Unit that Peru is a well-regulated country. Any regulator that allowed the current situation to arise under its watch should be questioned. MiBanco, the largest MFI in Peru, and its main shareholder, are dangerously close to requiring a bail-out. How can that possibly be considered good governance? It may have been good for investors for a few years, but a regulator has a slightly broader gambit than protecting return on equity for investors. Where was the client protection in all this? What is a multilateral such as the IFC doing investing in such a shoddy institution with tax-payer funding? Who is going to pick up the pieces if MiBanco collapses? What is going to happen to the entire Peruvian microfinance sector (which extends into the mainstream commercial banking sector) if there is a crisis such as Pakistan, Nicaragua, Bolivia, Morocco, Andhra Pradesh, Bosnia etc? What is going to happen to the genuine entrepreneurs who rely on capital to run their businesses?

This looks like gross incompetence to me. And while I’m ranting about the regulator’s deficiencies, the Economist specifically praised it for not using interest-rate caps (i.e. regulating against usury) – MiBanco doesn’t charge very high interest rates, but some MFIs in Peru are charging rates over 200%. What on Earth inspired the regulator to think that was going to help Peruvians grow their businesses? These people are on a different planet.

And are we to believe that MiBanco is the only bank in trouble?

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What are Some of the Signs of a Looming Microfinance Crisis?

I have received a few questions on whether I am suggesting this is the beginning of an actual Peruvian microfinance meltdown, and should clarify my stance on this.

Basically, I don’t know.

The signals are inconclusive. But when we look at previous crises (Bolivia, Morocco, Nicaragua, Andhra Pradesh, Pakistan, Bosnia etc.) there are certain triggers, or catalysts, that seemed to push a serious situation over the edge. They differ from country to country, and people have criticised my Peru piece on the basis that “Peru is not Nicaragua”. I totally agree with such critics, Peru is most certainly not Nicaragua, but that does not imply that there is nothing to learn from the Nicaraguan crisis, or any of the others. Obviously if many of the similarities in previous crises emerge in Peru, this would be cause for concern. So, what are some of these alarm bells, and do they apply in Peru?

Andhra Pradesh is perhaps the most publicised microfinance crisis to date. The broad accusation was that loan officers applied extreme pressure on defaulting clients that forced some clients to suicide. Whether or not these claims are valid, there is no evidence (that I am aware of) that this is occurring in Peru. The principal threat to non-repaying clients appears to be black-listing on the credit bureau and an inability to obtain more credit.

If anyone knows of cases of violence or humiliation used by banks against Peruvians, please send me the evidence.

All crises have over-indebtedness in common, and there is certainly sufficient evidence already to suggest this could be a problem in Peru. I have spoken to some funders over the last days, and opinions are mixed. As a broad rule, those with more money invested in Peru believe this is less of a problem, perhaps unexpectedly. I cited two reports in the original post supporting the fears of over-indebtedness. These are both somewhat out-of-date (the situation has likely worsened since they were written) and exclude the endless other sources of debt, formal or otherwise: cars bought on credit, those store cards you can get in Lima shopping centres in about 5 minutes, credit cards etc.

There are various definitions of over-indebtedness, and prior to the Nicaraguan crisis there was no clear consensus. I remember, I was there. But why is delinquency rising in Peru? Why have professional and experienced banks such as MiBanco been unable to control this? Why did they lose 100.000 clients last year? Why is this delinquency happening across the entire country rather than just at one or two troubled banks? We are fast approaching a situation when 1 in 10 Peruvians with loans are unable to meet their monthly repayments – think about that for a moment. No one wants to default on a loan, these people are cutting back their expenses, economising where possible, working harder, draining their savings, perhaps selling personal possessions, and are simply unable to meet their monthly loan repayments. Suggesting that this is not a cause for concern simply because the entire sector hasn’t yet collapsed seems a naïve stance to me.

Some Peruvians are in dire trouble, and we need to limit the extent to which this happens rather than suggest that it is not yet occurring to enough people to cause a systemic crisis.

Nicaragua was triggered by civil unrest. So far there has been no animosity against the banks, but there have been protests against the mining companies. This triggered the “no pago” movement in Nicaragua, as banks over-charged clients and tried to imprison non-repaying clients, which naturally irritated their families. There is no evidence of such behaviour so far in Peru, but it is not inconceivable. However, look at the interest rates some of them are coughing up, this could easily cause poor clients to rise up against their so-called benefactors. The 3 highest I have found so far, according to page 52 of the December 2012 COPEME report, are:

  • CMAC Del Santa 203.11%
  • CRAC Sipan 157.26%
  • Edpyme Inv. La Cruz 233.48%

Another potential trigger is the withdrawal of investors. We have seen this with BlueOrchard, and I have spoken to one fund who makes a similar claim but has been unable (or unwilling) to provide me with tangible evidence that it has reduced its exposure to Peru. Perhaps in a later blog I will examine the individual portfolios of a few funds to see if this is the case, but most funds are extremely non-transparent in revealing where they have invested, so this is not so easy.

An additional alarm bell would be depositors withdrawing their savings from the banks as they lose faith in them as guardians of their scarce savings. The evidence in the case of MiBanco is mixed. It actually has increased the number of depositors, but each depositor now holds a reduced balance. The overall effect in 2013 was a 1.7% decline in the total deposits held at MiBanco, which is not indicative of a run on the bank. But then again, the bank was only recently put up for sale, so it will be interesting to see the latest data to confirm if this remains the case.

Another alarm bell would be disconcerting action taken by the regulator. If investors perceive the regulator as making adverse moves that could harm their earnings, this could prompt investors to leave. If the regulator does nothing the situation is unlikely to improve. If the regulator offers overly-generous client protection (in the eyes of the banks and their investors) this could also trigger the departure of investors. What about an interest-rate cap? The Economist Intelligence Unit specifically praises Peru for NOT having such a cap (“The lack of an interest-rate cap, reasonable capital requirements and the availability of various legal structures create low barriers to entry” – register for free to download report). Most MFIs charge relatively reasonable rates, but even preventing interest rates of over 100% might be a wise move, as such loans inevitably lead to strife. And if either the investors or the general public perceive that the regulator is worried about the situation, this could trigger an investor exodus or a run on the banks as clients attempt to rescue their savings in the expectation of a possible crisis – also not ideal.

So actions of the regulator are also indicative of the likelihood of a crisis, but could themselves trigger a crisis, it’s a fine line. And Peru’s regulator is not in an easy position currently (although one could argue that it was the same regulator who allowed this current situation to arise).

Obviously the collapse of a major bank would be a serious alarm bell. The cajas are in trouble, MiBanco is in trouble, ACP Is in trouble – this is not entirely inconceivable. Collapses of institutions are often euphemistically described as “consolidation”, but is the collapse of a major MFI in Peru really that unlikely?

And of course, there are many other signs of a crisis looming. This is a brief blog post. Do we see these in Peru? Yes, some of them, to some extent. Does that mean a crisis is imminent? No, but it does mean we should keep our eyes peeled for more signs, and make concerted efforts to avoid a crisis, rather than keep going along the same trajectory with our eyes closed. Let’s learn from previous mistakes.

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Update on the Unfolding “Problems” in Peru, Friday February 7th

I have received endless calls, emails and messages about my recent post, almost unexpectedly, so I feel obliged to keep my loyal readers up to date on the unfolding problems in Peru. I have therefore diligently prepared three new posts (I will assume that readers of these posts have read the original):

  • An update on recent events (below)
  • A brief description of some of the warning signs of a microfinance crisis
  • A brief analysis of the financials of MiBanco up to Dec 2013 based on MixMarket data

First, Credicorp posted some disappointing results. Earnings are down 28.1% in 2013 due to “extraordinary expenses” in their investment bank and insurance areas. So, does this increase or decrease their chances of buying a defunct and large Peruvian bank such as MiBanco? There’s no comment so far.

But in a comic twist, following the rather unexpected sale by Grupo ACP of a 12% holding in BancoSol in Bolivia (they still hold a 6% stake after the sale), the CEO of BancoSol made a most extraordinary statement. I shall use Google Translate in order not to be accused of unfair translation:

“As part of its investment policy worldwide, and on the understanding that [Grupo ACP’s] mission to establish strong microfinance institutions that empower microentrepreneurs in several countries has been met in Bolivia, ACP decided to transfer part of their participation in a group three European banks through the advice of the prestigious Responsibility Investments AG of Switzerland.”

So, according to this interpretation, Grupo ACP decided to sell simply because it had already achieved such stellar performance in Bolivia that it would flog the shares to the Europeans. No mention of the fact that Grupo ACP is in technical default on its senior bond, presumably facing a rather dire cash crunch, and looking to sell whatever it could to avoid a full-blown default on the bond prompting Fitch to cut the rating to junk status. Are we to believe this was a pure coincidence of timing? And with their clear mission to “empower microentrepreneurs”, there was no mention either of the fact that MiBanco, ACP’s main asset, empowered nearly 100.000 fewer this year.

And what exactly is ACPs current “investment policy worldwide”? I suspect if could be “flog anything you can and use the funds to pay interest on that pesky bond that we should never has issued in the first place” – hardly a sophisticated strategy.

My question is simply, what gets flogged next? Banco Forjadores in Mexico? Apoyo Integral in El Salvador? Emprenda in Argentina?

But my questions don’t end there. How much did ACP get for the sale? I imagine the “prestigious” responsAbility made a tidy buck on that one. Someone in Switzerland will get a nice bonus this year. Such prices are rarely disclosed, and given the political and regulatory risk in Bolivia right now it is hardly a risk-free investment.

The million dollar question, obviously, is whether Credicorp (or anyone, for that matter) has agreed to buy MiBanco. If they decline the price will plummet. It’s one thing to offer a widget for sale at $10, it’s another thing to wonder around seeing if anyone will buy your widget in a hurry despite others having announced in the national press that they aren’t interested. The longer they wait the lower the price, and the greater the stress to ACP and speculation in the market. Maybe they could post it on eBay?

“Peruvian bank for immediate sale, any offer accepted, cash only, vendor assumes no responsibility for the quality of the portfolio or for the cost of a major restructuring involving substantial redundancy payments, buyer will have to share ownership with some pretty irate Dutch investors, the vilified microfinance fund Accion, and the IFC. See other items for sale by this vendor”.

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