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What do IPOs bring to microfinance?

Published on September 19, 2012

A question that gets presented repeatedly to me is stated something like this:  “Are you against profit in microfinance?  We need profit to grow, so why are you negative about IPOs?”  To answer that question, I’ll need to first talk about my views on profit, and then I’ll relate those to the issue of IPOs.

Profit, yes, but how much profit?

I’ve not ever been against “sustainability” (as we used to call “profit”).  I spent 15 years of my life working on the Microfin financial projections software that the majority of the industry uses to make their business plans and determine how to be profitable.   Both of the well-known IPOs – Compartamos and SKS – used my Microfin software in earlier stages of their institutional planning.

In my 27 years in microfinance, I have never once said that aiming for profitability is not a justifiable goal – just the contrary.  But most of those 27 years were in the “olden days”, when we were lucky to break even.  My concerns over the past ten years are that we have no serious discussion on the question of “How much profit is too much profit?”  You can see much more of my thoughts on that point here.

My position is that earning a “responsible” level of profit is acceptable, and that we need to be extremely careful and fully committed to responsible decision making when we are lending money to the very poor at the bottom of the economic pyramid (and mostly women), prices are non-transparent and difficult to understand, and we are working in quite imperfect markets that vastly benefit the seller over the buyer.

Pure business theory would say that these are the prime conditions for quick profits.  Early entrants reap the benefits, and others then enter the market to try and also reap quick wealth.  Supply grows, and supply eventually meets demand, forcing prices and profits to an equilibrium level.  But reaping the “Fortune at the Bottom of the Pyramid” is not the original vision of we who started innovating in microfinance.  Many of us are arguing that responsible microfinance requires responsible decisions by management, not decisions centered on profit maximization.   A CEO-friend of mine said, “I’m not against profit, I’m against profiteering.”

What are the benefits – and risks – of IPOs?

So profit isn’t bad, within limits, but do we therefore need IPOs?  IPOs are argued to be necessary to increase scale.  That’s perhaps true if you’re a huge manufacturing company needing to build more factories, but IPOs are not needed for growth to occur in microfinance.  The amount of money we need is not that large, and the funds can, and are, mobilized from private equity investors.  And anyone paying attention would see ample evidence that we don’t have much of a supply shortage problem in many countries.  Rather, we have a repeated occurrence of over-indebtedness, with growing percentages of the client base juggling multiple loans.

So if not really needed for prudent growth and for providing credit to those not already having access, what other motivations are there for IPOs?  I think it is rather apparent that the other primary motivation is the potentially huge return going to the original investors.  When all goes as planned, the IPO allows the original investors to cash out some of their initial investment as new investors buy up the shares.  The Compartamos IPO was a 100% secondary sale of shares to allow original investors to “cash out”.  No new equity was raised for Compartamos.  Instead, US$400 million in cash went into the pockets of the initial investors, who also received another US$1.6 billion in wealth for the shares they continued to hold to sell later.

Was the IPO necessary to help Compartamos grow?  I see no evidence.  To the contrary, they could have grown through financial leverage (which they have completely ignored, because they had far more equity through profit than they could use).  They could have grown through inviting in new private equity, as there were many standing in line wanting to do so, but they accepted not a single new investor in their seven years as a privately held for-profit.

The SKS IPO was more “balanced” as I point out in this presentation here, but I believe the same arguments can be made – the SKS IPO was not necessary for growth, the Indian market was experiencing serious over-indebtedness problems, and the original investors were pursuing an IPO in order to extract large financial gains.

Public For-Profits vs Private For-Profits

My last concern on the issues of IPOs is that an institution choosing to fund itself through private equity can control who sits at the table.  It can invite in investors that agree on core values and turn others away.  It can set standards on the maximum amount of profit the business will choose to generate.  It can set prices to target those profit levels, rather than follow the path of “charging what the market will bear and maximizing profits.”

The rules turn upside down when a business converts into a public for-profit.  In some countries, it is a legal obligation for the managers to maximize profit for the shareholders.  Even if not so, any person, with whatever values or goals, can purchase your shares when they are sold openly.  Shareholders have a voice and vote at meetings and can overrule the desires of management.

The publicly traded institution seriously risks losing the ability to maintain any commitment to core values centered on responsible pricing and responsible profits.  If the opportunity is there to get very rich off of loaning money to the poor, how does a publicly traded company say, “We proudly choose not to act that way”?  That is my main concern with IPOs.



  1. There are two issues here. One is whether the Compartamos IPO was positive in and of itself and the second is whether or not the IPO was a positive step for microfinance, impact investment and businesses serving the base of the pyramid. I’ll write more about the Compartamos IPO specifics in a future TMITM blogpost, but here are my big picture answers:

    * 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!

  2. Chuck and Lauren

    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

  3. Chuck,

    Today’s news does shed positive light on IPOs:

    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!

  4. Chuck Waterfield says:

    Thank you Hugh and Lauren for your comments on this post, I am pleased to inspire some debate around this controversial topic.

    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.

    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

  5. Henrique Martins de Araujo says:


    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.