Has the Microfinance Market Come of Age?

The CGAP paper provides an excellent source of information to understand the SKS IPO. It also compares the two notable pure-microfinance IPOs we have seen – Compartamos and SKS. What do these two have in common? Where do they differ? What lessons, if any, can we draw from studying these first two, historic events? Do the IPOs signal that microfinance is a mature market and ready to open up to a wide range of mainstream investors?

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Let’s first look at the pre-IPO comparison and then see if those differences had any impact on the results.

– Transparency: The Compartamos IPO, over three years ago, took the microfinance industry by complete surprise. The IPO was planned in nearly complete secrecy to the microfinance industry. In contrast, the SKS intention to hold an IPO was very public knowledge for years, generating wide discussion during which SKS was as responsive to questions as allowed by law.

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– Openness: Compartamos was completely closed to new equity prior to the IPO. A small group of investors took part in the initial equity injection of just $6M in 2000. Despite interest from other investors, there were no additional equity rounds or investors allowed in during the next seven years, until the IPO. In contrast, SKS had four equity rounds in three years, bringing in new investors each round and raising a total of $127M.

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– Client benefit: A frequent question in microfinance is about how to involve clients in the profits. Compartamos designed no means to involve clients in profit sharing. SKS, partly due to government law, created five Mutual Benefit Trusts (MBTs), owned and managed by the clients. This appears a very promising approach, but in application there are valid concerns that the MBTs gave up far too much of their decision-making powers to Vikram Akula and Ankur Sarin.

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– Motive of IPO: Compartamos was questioned on the motive of their IPO, as it was designed purely as a cash-out IPO, with no new shares being issued and no new funds being raised for Compartamos. Instead, existing owners sold 30% of total shares and took $550M away. In comparison, the SKS IPO was designed as a blend, with existing shareholders cashing out 13% of their holdings and SKS selling an additional 10% of new stock to bring additional funds into SKS.

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– Financial targets: Compartamos was challenged for years on their decisions regarding prices and profits, and SKS argued they approached these decisions quite differently than Compartamos. There are significant differences between the two countries, but we can still draw important conclusions after studying the key numbers. We don’t publicly have the true price of either’s loan products, but portfolio yields for Compartamos were extremely high (around 88%), while SKS is at 26%. Profit as measured by ROA was also 23% for Compartamos and only 5% for SKS. Compartamos used extremely little leverage (1.3 D-E ratio), and SKS somewhat more (3.2), resulting in ROEs (Return on Equity) that investors focus on of 57% for Compartamos and 22% for SKS.

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In summary, Compartamos was very aggressive on all of these measures except leverage, while SKS indicated more moderated behavior and has been subject to less criticism about profit-maximizing behavior. Both IPOs were very successful in financial terms, but the SKS IPO was more in line with defensible rates of return.
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SKS was not a repeat of Compartamos. We should then expect this second IPO to generate less controversy than the first. Did it?
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In fact, the news since the IPO has been disturbing. An IPO that was pitched as signaling that the Indian microfinance sector has reached maturity is closely followed by a rash of bad news, some involving SKS:
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• – SKS inexplicably fires CEO Suresh Gurmani without notice, and he is then reappointed by the high court.
• – News reports of dozens of suicides reportedly tied to loan delinquencies, some of whom are reported as clients of SKS.
• – The Finance Ministry of India, seeing high profits made from the poor, and accounts of client abuse, calls for a reduction in interest rates for all MFIs.

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This post-IPO news does not send the signal to the marketplace that microfinance is a mature market, ready to open up to a wide range of mainstream investors.
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For the past 15 years we have been encouraged to “bring microfinance into the marketplace,” and the SKS IPO is a symbol both of our arrival and of the difficulty of having arrived. The core issue we must address and discuss is that microfinance cannot be considered just “business.” We are a business which focuses exclusively at the bottom of the pyramid. That entirely changes the rules and obligations of business as well as the expectations we are held to by the public.
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Both SKS and Compartamos are very large scale, comprised almost entirely of low-income women – a noble target group to serve, but a distasteful one from which to reap wealth for private investors. Few of us in microfinance are against the concept of profit, but there are qualifications that we need to address and define, or we run the risk of the world seeing no difference between microfinance and the moneylenders we set out to displace. How do we demonstrate we have not become them? Two questions we must address are: 1) How much profit is too much? and 2) Who benefits from that profit?
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Why should we make significantly higher profits loaning to the very poor than commercial banks make from the middle-class and wealthy? The Compartamos IPO resulted in a 300-to-1 return on initial investment to the original investors. The SKS IPO resulted in what looks like a 12-to-1 return to the original equity investors. IPO returns were much lower for SKS, and profits and prices are much lower for SKS, and these appear to be related to intentional decisions by SKS prior to the IPO.
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But the SKS returns are still higher than the commercial business world, and the public still wonders if we have any limits, if we have any answer to the question of “how much is too much.” SKS planned what they intended to be a safer IPO for microfinance, but it still has some created some friction and problems for microfinance in India and more globally. We are maturing as an industry, but we haven’t yet matured. We still have quite a bit of work ahead of us on defining what responsible microfinance means in practice.
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Please click here to view the original article with comments on CGAP’s website

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