This is an interesting debate. Lauren has already made some great remarks about the need for IPOs in microfinance, and Hugh made a very relevant remark – why get into bed with the enemy? So I will focus on your concept of “responsible” profits. I have been engaged in the microfinance industry for the past 6 years providing funding and equity to MFIs, both on the DFI and MIV side. During this time, I have visited over 300 MFIs in 50 different countries. What I have seen – confirmed by academic research and benchmark comparison (Mix or CGAP) – is that the main driver of profitability of an MFI is efficiency and scale, and not high interest rates. So by capping returns, we would be penalizing – and ultimately killing – the very same MFIs that should instead be rewarded and used as a benchmark for those who have not yet achieve financial/operational sustainability.

Even if we look at MFIs like Compartamos and LAPO, as they reached scale and developed more efficient operations, the interest rates came down, benefiting the clients – public pressure certainly played its role, and Chuck and Hugh are commendable for taking on the fight. But capping returns is a short-sighted and will hurt the industry, not matter how much well-intentioned you are.

In this response, I’ll focus more on Hugh’s comments, as I feel we do need a prompt response to Hugh’s quip that MicroFinance Transparency is the beneficiary of IPO profits. Deutsche Bank gave us a grant of $30,000 in November 2009 – three years before they bought and sold SKS stock. The funding was to further education in the industry on pricing and contributed to some very useful outputs, including our widely-used Pricing Calculation Tool. DB now makes profit three years later by buying and selling SKS stock and you ask if my organization has benefited from the SKS IPO. I see no possible connection, so I guess that means my answer is “no”. ☺

I’ll address the questions Hugh presented directly to me in his other posting, but as these are sensitive questions, I need to first state the following: My view, and the position of MicroFinance Transparency, is that all data is complex, and all motives are complex. To complicate matters, data is often a very flawed indicator of motives, especially when data is reviewed quickly and superficially. When analysts of any ideological persuasion look at data, they often see what they expect to see (i.e., their conclusions reinforce their biases). To resolve problematic situations, I believe dialogue works better than hurling accusations, so I try to refrain from hurling accusations.

Having stated that, your first question asks me to confirm if Compartamos charges 195%. First of all, numbers without definitions are dangerous. I am not aware of the formula and definition being used to reach 195%. All calculations I have ever published are based on information Compartamos posts publicly on their website, as I do not have access to anything else directly from Compartamos. You can see in this paper linked below (and funded by Deutsche Bank, coincidentally) that the APR (including taxes and security deposit) was 129% on loans they made in 2007, based on the sample repayment schedule on their website at that time.

http://www.mftransparency.org/new-paper-the-challenge-of-understanding-pricing-of-micro-loans/

Your second question to me asks if I think that at the large amount of money that PSM controls is being used to benefit the poor and therefore justify the IPO. I can’t answer the first part of that question because I have no knowledge of what PSM does with the money. When I last looked, their website contains no financial statements, no audits, and no indication of even a single project funded. I contacted PSM by phone and by email requesting that information and none of my messages were returned. The only thing I can therefore conclude is that PSM is choosing to not be transparent. Last year they did not even post the names of staff or board on their website, but that may have changed since then. So we have an NGO that controls vast amounts of windfall profits generated from an IPO that was driven by extremely high profits generated by loans made to women at what are arguably extremely high prices. That NGO is extremely non-transparent on what they do with that money. Do we therefore conclude that the money is not being used in ways that help the poor? I can’t conclude that, without evidence. But my view, in all matters financial, is that transparency is necessary to instill trust. Without transparency why should there be trust?

If we had evidence that all the IPO winnings were being used to fund meaningful projects for other poor people, I would still be concerned about IPOs-in-general. With NGOs benefitting, we are arguably using a rather uncomfortable model of “redistribution of wealth” based on extracting profits from one group of poor and then deciding ourselves what to fund directed toward another group of poor people. And if those funds are used to fund other for-profit businesses targeting those other poor people, the situation is potentially a model for generating wealth from the bottom of the pyramid (with potentially much of it going to the top of the pyramid) instead of generating wealth for the bottom of the pyramid.

These are important and complicated issues that we now must deal with given that a large portion of microfinance has now been commercialized. I look forward to hearing what others have to say on these points.

Chuck Waterfield
CEO, MicroFinance Transparency

Today’s news does shed positive light on IPOs:

http://timesofindia.indiatimes.com/business/india-business/Deutsche-Securities-exits-SKS-Microfinance-via-bulk-deals-with-RBS-Morgan-Stanley/articleshow/16559814.cms

While this may not be an MFI you entirely approve of for the reasons cited, the IPO enabled Deutsche Bank to buy 9.15% of the equity of SKS and dump it a couple of months later, which may never have happened had the IPO not taken place. They paid Rs75.4 per share in late July, and sold them for approximately Rs120 yesterday to two buyers. I make that about a 60% return on the investment, in only two months, which is not bad – annualize that and this competes favourably with those who benefitted from the Compartamos IPO. The SKS IPO facilitated this transaction. As with the case of Promotora Social and Smart, Deutsche Bank can justify such profiteering on the basis of pumping money into worthy causes. They fund the Smart campaign, of course. But, they also fund MFTransparency.

So, dare I ask the impertinent question: are you not now, is a roundabout way, the beneficiary of an IPO!

Great article and interesting response from Lauren. Without going into too much detail here, as this is a huge topic, I wonder if it would be possible to get some clarification. David Roodman’s calculations suggested the total cost of capital charged by Compartamos reached 195%, and I am unaware of any challenges to this. I think many would consider this to have crossed some sort of “red line”, as I think Yunus referred to it as. Is this actually the level of interest the poor are being forced to pay? Chuck, your combination of MFT knowledge and the IPO knowledge should be sufficient to confirm this, and Lauren, you presumably are aware of this also?

Secondly, could someone clarify the role of Promotora Social Mexico? I thought, but am not sure, that this institution was set up specifically to invest some of the proceeds of the IPO. I have tried contacting them, to no avail, their website is light on information. If, as Lauren seems to suggest, the proceeds of this IPO were used to benefit the poor, this is certainly a mitigating factor (whether it excuses the IPO criticisms of Chuck is debatable, I tend to veer more towards Chuck’s stance than Lauren’s here). Chuck – do you buy this argument? Does PSM mitigate your concerns somewhat?

Regarding the Smart Campaign, I am sceptical of this body, as I have mentioned elsewhere. They claim to promote fair, transparent pricing, avoid over-indebtedness etc. I am currently in Mexico, scene of the IPO, and see an entire sector approaching a crisis point, with chronic over-indebtedness and astronomical interest rates with correspondingly high delinquency. Perhaps I am over-simplifying matters here, but if I had to pay 195% interest on my loans, I would probably be unable to repay. It comes as little surprise that Mexicans appear to agree. What does come as some surprise is that the Mexican regulator and the self-regulatory bodies such as Smart are not intervening. Many of the worst offenders, indeed, are endorsers of Smart, and yet their actions appaear to entirely contradict the client protenction principles. Any explanation for this apparent contradiction?

Anyway, good article Chuck. Whether private equity is the solution or not is an on-going debate. I am sceptical. This is standard neo-liberal free-market profit-motivated rhetoric, but time will be the best judge.

Hugh Sinclair
Author – Confessions of a Microfinance Heretic

* Did the IPO contribute to the greater good? 81% of the IPO proceeds went to the social and non-profit organizations that were willing to invest when there was little reason to believe that the business model would prove sustainable, much less profitable. These are precisely the desirable ‘private equity’ investors you refer to, but unless they can exit investments, the microfinance industry cannot grow. I led the IPO transaction on behalf of one of those non-profits, ACCION International. The money ACCION made on the IPO is financing important programs and activities around the globe that would otherwise not have been possible. IPO money enabled the formation of the Center for Financial Inclusion and provided resources for the SMART consumer protection campaign. It provided capital for the establishment of new MFIs in hard to serve areas like Amazonas in Brazil, Inner Mongolia in China, Nigeria and Ghana in Africa. IPO money enabled the creation of a new Venture Lab to support very early stage financial service innovation for the BOP. Oh, and that money was provided by the qualified institutional buyers (managing more than US$100 million) who felt it was worthwhile to pay 13 times book value for their shares. That makes for a positive wealth transfer story in my book.

* We need IPOs because private investment hinges on the ability to exit at some stage. A broader range of exit options can open the door to significant capital flows.

* We need IPOs because public market regulation requires a level of transparency that is lacking in private markets.

* We especially need IPOs for social businesses because sustainability means changing our global mindset to recognize that ALL investment must factor in social and environmental outcomes. Today, these are considered externalities unrelated to financial performance.

* Institutions that fund themselves through private equity may or may not have control over who sits at the table. The pool of potential investors is relatively small, meaning that an organization may be forced to take what capital it can find on whatever terms are offered. Even if initial shareholders can be carefully selected, many countries prohibit shareholder agreements that seek to control secondary sales. In other words, you may be able to pick the first round of shareholders but you can’t necessarily prevent them from selling to someone you don’t like when they decide to exit.

* Public institutions can and should put their values front and center, incorporating them into by-laws and statutes and communicating these values to others. Shareholders don’t vote at Board meetings, Board members do, in consultation with management. Public institutions generally require regular and transparent reporting and the presence of independent directors, good practices often overlooked in private firms. If shareholders don’t like the way Boards and management make decisions, they will sell their shares and the stock price will go down. An institution can then choose to backtrack in the hope that the stock price will go up again, or it can choose to make a stronger case for the strategy it has chosen.

If public institutions cannot find ways to make and maintain commitments to core values, then all of us working on ESG, SRI and impact investment should just pack up and go home. What you are saying, Chuck, is that you have no faith in humanity’s ability to act responsibly. I admit, it can be hard to have faith that the greater good will prevail, but that only makes it more important to push mainstream capital markets into the sustainable and responsible arena. Early data shows that public companies that make demonstrable commitments to good social and environmental practices perform better than those that focus only on profit maximization. That’s a message the whole world needs to hear!