Incorporating Microfinance Institutions into Capital Markets

1. Incorporating Microfinance Institutions into Capital Markets If it talks like a duck, walks like a duck & looks like a duck, it is more readily treated like a duck Drew Tulchin Social Enterprise Associates BYU, 6th Conference on Microenterprise March, 2003

2. Incorporating Microfinance Institutions into Capital Markets • Introduction • Understanding the Duck • Talking like a Duck • Walking like a Duck • Looking like a Duck • Duck Examples - Microfinance & the Capital Markets • Q & A

3. Drew Tulchin Social Enterprise Associates A network of professionals making communities better by applying business skills & sustainable practices. Who are you? What brought you here today? Introduction Who am I?

4. Definitions & Assumptions • Terminology • MFI = Microfinance Institution • Define Microfinance, Micro-credit, Micro-debt, etc. • Microfinance in Development • Microfinance is NOT a universal development panacea • MFIs have proven the model & shown profitability • The promise of microfinance as a sustainable effective development tool is still unrealized • Microfinance Moving Forward • The industry’s next decade will be one of extensive change – ‘failures’ & consolidations • Profit is NOT a dirty word

5. Incorporating Microfinance Institutions into Capital Markets • If it talks like a duck, walks like a duck & looks like a duck, • then it can be more readily treated like a • duck with regards to accessing capital markets.

6. PICTURE Est. Total Portfolio Value of MFIs Est. Total Customer Need / Demand $300 B $4 B Where is this money going to come from?

7. Understanding the Duck

8. Understanding the Duck • 99% of MFIs are funded by donors • DONORS give money • a MFIs experienced (& good at) pitching them • Current model: 5 years as NGO w/ donations, • 2 years to transform into commercial bank • What happens when donors go away? Where does $$$ come from for MFIs?

9. Understanding the Duck • INVESTORS make investments • a MFIs less experienced (& good at) pitching them • Investors vary: individuals, socially responsible investors (‘SRI’), institutions (‘The Street’) • What happens when MFIs don’t perform? Where does $$$ come from for Capital Markets?

10. Understanding the Duck • INVESTMENTS produce return • a MFIs face results oversight, potential mission drift • Investments are easiest when: • Industry is known • Vehicle is easily understood • Risk factors are known, identified & measured • Comparable to other investments • Have a track record / history • What happens when MFIs cannot compete? What do investors expect from capital markets?

11. PICTURE ANNUAL giving of all US Foundations (2000) DAILY transactions on Wall Street (2000) $1 T $5 B Which pot of money would you rather be drawing from?

12. Talking like a Duck

13. Talking Like a Duck • Language • Is a communication tool • Is an indicator of behavior • MFIs & Investors • Do not speak the same language • Do not use the same vocabulary Investors expect to hear their language & their vocabulary

14. Talking Like a Duck

15. PICTURE % financially self-sufficient, (a.k.a. profitable) Number of ‘Counted’ MFIs 10,000 1% Which group would you prefer to belong to?

16. Walking like a Duck

17. Walking Like a Duck • MFI Characteristics When Seeking Investment • Non-Profit Organization (NGO) • Mission driven • promote need for service to help impoverished people • ‘Informal’ • Metrics of success • # of loans made portfolio size • default rate people helped

18. Walking Like a Duck • Investment Barriers for MFI Characteristics • Are NGOs known for professionalism, as investment option? • (There are exceptions: public housing, CDFIs, LISC, etc.) • Who ‘owns’ the entity? The Board of Directors? • Is there accountability, reporting, strong systems? • Given the social mission, is management prudent, financial management practiced & are risks assessed? • Do investors understand & care about the metrics?

19. Walking Like a Duck • Investment Advances for MFIs Characteristics • Professional presentation • Ensure the house is in order • timely reporting; management systems in place • Be realistic, cautious in management & growth • Address governance – establish a commercial entity • Have ownership represented by Board of Directors • Promote ‘double bottom line’ – economic & social return

20. PICTURE Gas Companies (Cash Cow) Profitability Amazon.com (the early years) Growth Which side of the line returns an investment?

21. Looking like a Duck

22. Looking Like a Duck • MFIs Need to be Savvy & Business-like • Understand the investor ‘customer’ • Develop investment ‘products’ customers want • Differentiate customers • They are NOT all the same • Tailor products to increase sales • – e.g. Mercedes Benz, but also Ben & Jerry’s

23. Looking Like a Duck

24. PICTURE Donation Investment $ Return? Yes $ Return? NO How much return are investors seeking? (Source: Morino Institute)

25. Duck Examples - Microfinance & the Capital Markets

26. Duck Examples – MFIs in the Capital Markets • Prisma Microfinance • US for-profit international MFI • Wholly owned subsidiaries by country • Raised $1.25 mil venture capital to date, • In same manner as any US high growth start-up

27. Duck Examples – MFIs in the Capital Markets • Trinidad & Tobago MFI • Affiliated with development bank • Offering received ‘BB’ Rating from private company • Bond Offering: $2.8 mil • Well structured - Coupon paid quarterly, 10 year (w/ renewal), Liquid (w/ put option) • Customers given board placement - dev bank, private investors (insurance companies), IADB (MIF)

28. Duck Examples – MFIs in the Capital Markets • Investment Models Avail. to Individuals • Calvert Social Investment Fund (US SR Mutual Fund) & Wisconsin Coordinating Council on Nicaragua (WCCN) • Investors: ‘choose’ returns, onlends @ neg rate 10%, med term. • Size = $50 mil, $3 mil • Oikocredit (Dutch based religious org) • Investors: negligible return, onlends @ market rates, short term. • Size = $30 mil disbursed in 2001 • Blue Orchard (Swiss Investment Firm, not really individuals) • Investors: averaged 8% return to date, onlends @ market rates, • short term. Size = $12 mil

29. Duck Examples – MFIs in the Capital Markets • More Examples(if time allows) • Credit Unions as a whole WOCCU • Compartamos $10 mil bond offering • Mexican MFI Commercial Bank, ACCION affiliate • 3 tranches, all fully subscribed • Investments w/ Minimal Return, but Worth Mentioning • Shorebank Advisory Services: Chicago CDFI, US domestic • Alterfin: Belgium bank offering secure CDs, then onlends them • Canadian Cred Union: FDIC insured savings (shhh!)

30. PICTURE US Prime Rates $$$ in SR Funds (millions) Is the timing good for MFIs to access Capital Markets?

31. Recap • Introduction • Investor’s methods for capital investments are different than donor’s methods • Investors as a market & their expectations • MFI typical behavior = barriers to investment • New approaches possible • in language, structure & behavior • Case Studies of MFIs & investment options • Our Duck

32. Q & A Thanks for listening, quack! Drew Tulchin Social Enterprise Associates www.SocialEnterprise.NET drew@SocialEnterprise.NET 617-872-0194