Looking at Microfinance IPO Controversies (SKS and Bank Compartamos)

This is the second part of a two-post series on IPOs in microfinance.

Coming to the next point, two recent articles published by The Economic Times accuse SKS of gross mismanagement and low levels of transparency. The claims of these articles, entitled ”Top 3 microfinance companies used poor as puppets” and “ How top 3 Microfinance cos raised funds in the name of poor?”, were refuted by Vikram Akula, but that did little to change the newspaper’s stance.

The case of Bank Compartamos was documented in detail as well in terms of shady management practices. There were rumours about public aid money, intended for running the microfinance institution, going into the pockets of shareholders. However, CGAP released a case study about the IPO in which the authors say:

“Our view is that the public aid money given to Compartamos has not been inappropriately diverted to private pockets.”

Many people are of the view that there is nothing wrong with helping the poor and making profits at the same time, as long as one remembers that microfinance must first create social value. Huge market potential as been realized in the bottom of the pyramid and as a result, microfinance should be no different.

A moral debate lingers nonetheless.

A detailed account of how the initial shareholders of Compartamos made a rate of return of around 300% over 6 years will shock many. Similarly, the fact that Vikram Akula and 60 other SKS staff employees became millionaires after the IPO [4] by virtue of their stock options, was not warmly welcomed either.

As previously mentioned, Bank Compartamos and SKS started out as NGOs, attracting massive amounts of donor funds, so the transformation into for-profit public entities was a little hard to digest, even though it was completely legal.

Let us also remind ourselves that Indian regulators left SKS with little choice when it came to generating money on a large scale. This was because as a non-banking finance company (NBFC), SKS was not permitted to utilize public deposits for growth, like Grameen Bank did. In other words, Indian regulations prevented SKS from going down the well-trodden path of offering micro-savings to expand their lending portfolio, and so the organization had few alternatives for spearheading growth.

Professor Yunus is quick to point out that SKS could have encouraged policy makers to favourably change regulations, but that is not easy.

The positive result of both IPOs was that it proved microfinance is a good investment opportunity for both public and private investors. Bringing microfinance to mainstream financial markets ultimately helps the poor. Concerns over profit-maximization at the cost of client welfare abound, but shareholders in any successful company know customers come first. Almost four years after the Bank Compartamos IPO, we haven’t seen our fears come true – interest rates were lowered, client protection principles were adopted and lending portfolios were increased. Despite this, it is still too early to say how favourable or harmful these events were, and all our assessments are merely educated guesses.

From an investor’s point of view, these firms have weathered the storm and are still doing well – their stock prices have fallen slightly and settled over time (they were previously said to be over-valued owing to the unrealistic hype about returns). This can be interpreted in several ways – some may say the bubble has burst, while others may feel that it proves microfinance is a resilient model after all.

IPOs in Microfinance – Introduction and Issue of Interest Rates

The issue of commercialization of microfinance through access to capital markets clearly divides the microfinance sector. Some, like Vikram Akula, the Chairperson and founder of SKS, feel ‘McDonald’s style growth is the fastest and most effective way to alleviate poverty for most people’ [1], while others such as Muhammed Yunus, founder of Grameen Bank, feel this ‘endangers the whole mission’ of microfinance. In reality, the debate isn’t as simple as this, and we take a look at two examples to highlight the potential benefits and drawbacks of the incidence of commercial investment in microfinance.

Some background stats

• SKS

Country: India

Nature of Capital Market Activity:  Initial Public Offering (IPO) on July 28, 2010

• Bank Compartamos

Country: Mexico

Nature of Capital Market Activity: IPO on 20^th April 2007

Bank Compartamos and SKS are the two most popular microfinance IPOs and both were highly controversial transactions. Both MFIs were attacked against various factors, such as high interest rates, the sudden wealth acquisition of original shareholders, etc. Despite this, growth expectations were unrealistically high, which is why despite the negative attention dished out by the media, Bank Compartamos and SKS shares were heavily over-subscribed prior to their IPOs.

The IPOs were justified by the management citing the need to make microfinance commercially viable (better outreach, greater efficiencies, improved product diversity, and so on and so forth ). While Bank Compartamos expressed concern over stiff competition from MFIs backed by commercial banks in Mexico, SKS expressed frustration over not being able to rely on public deposits (micro-savings) to reach out to new communities in need.

This argument is perfectly aligned with economic theory and it will take a few years before observers can truly judge whether SKS and Compartamos followed through with their plan. However, the media, NGOs (and the Indian government in the case of SKS) have been quick to highlight various issues that tarnished the images of these MFIs. Since these reports have been both vehemently supported and opposed (some of the more popular contentions, along with their negations, have been summarized below) it is difficult to know where the truth lies.

Bank Compartamos is famous for its interest rates which are exorbitant by international standards, yet low by domestic standards. A few years ago, the effective annual interest rate (APR) was over 100%  and we know many factors contribute to high interest rates in microfinance, the main reason being high operational costs involved in the high-touch lending model. The bank, not surprisingly, justified their figures by pointing out labour costs were exceptionally high in Mexico compared to those in large Latin American countries and Asia, and that their loan sizes are pretty small.

Also, let’s not forget that Bank Compartamos drastically lowered its interest rates in the years following the IPO [2] citing policy changes.

While SKS’s interest rates are low by international standards, and significantly low compared to Bank Compartamos’s rate, the MFI still faced much heat. At the time of the IPO, the figures were a little over 26% but the spate of suicides among microfinance clients in India angered many and the government imposed stricter regulations on the sector.

SKS is not directly implicated in these reports but the incidents added fuel to the IPO storm. It is also worth mentioning here that the Indian state-government ran a rival shelf-help group in the province of Andhra Pradesh [3] so politico-economic conflicts cannot be ruled out. Soon afterwards, SKS voluntarily lowered their interest rates by around 2%, but the move was not entirely welcomed.

Part 2 of this article will discuss two other controversies related with the IPOs.

Information Technology Can Develop Economies Through Social and Natural Capital

This is a continuation of an article about the importance of technology in the development sector; part one covered development through physical and financial capital with the help of different modes of technology.

Social Capital for Development and Information Technology

(Includes hints of physical capital)

Social capital covers networks, communities, and institutions that enrich the social fabric of individuals. Even though this form of capital is highly intangible, it is no less important than the others because social contracts and cultural contexts play a central role in the lives of people in developing countries. Because of the over-arching nature of technology, physical capital (technology, equipment, etc.) is vital in enhancing social capital, and hence, examples mentioned previously are applicable here as well.

Before we discuss how information technology enhances social capital, it is important to link social capital to the Millennium Development Goals of gender equality and global partnership for development. The latter MDG is vague and expansive, and can loosely be accomplished by creating a global knowledge sharing database/platform where individuals and groups come together to discuss specialized ideas. The former goal can be addressed less indirectly through information technology, and three renowned business models come to mind:

• Kopernik is a website that connects breakthrough technology providers with technology seekers (individuals in the field) with the support of generous donors around the world who finance the transactions.
• M-Pesa is a mobile banking platform that is slowly changing the way Kenya’s society handles cash and empowers entrepreneurs to take out loans and save money for rainy days.
• E-Chaupal is a network of computers with access to the internet, which farmers in rural India can use to get the latest agricultural marketing (prices of farm inputs, weather updates, affordable suppliers, etc.) and information from.

These examples not only serve to augment information sharing between groups and communities, but also have a spill-over effect on Millennium Development Goals previously mentioned. For instance, the elimination of intermediaries (through e-Chaupal) strengthens ties between farmers and improves their bargaining power, which impacts the MDG related to ending poverty and hunger. Similarly, the provision of new technology solutions, such as home solar panels and water purification systems (through Kopernik) impacts MDGs related to environmental sustainability and elimination of poverty and hunger.\

While gender equality may not be a direct result of these innovative solutions, it may, however, be an indirect result of strengthened communal ties and empowerment of end-consumers (both men and women). Additionally, new software solutions can be designed to improve literacy levels of girls and women and these programs can be delivered through mobile phones, and SMS campaigns can be launched to positively change public opinion about women rights.

Natural Capital for Development and Information Technology

Natural capital covers natural resources such as land, water, minerals, and anything else naturally available for man’s consumption. The relevant Millennium Development Goal is environmental sustainability, the lack of which is detrimental to the progress of the poor. Issues such as water sanitation and food security plague developing countries, especially those that have been inflicted by natural disasters and wars. Inadequate availability of natural resources also hinders economic progress of individuals because along with knowledge and skills, people need access to good quality raw materials to run their businesses.

There aren’t many examples to go by in this case, but here is a promising mobile phone application:

FLOW (Field Level Operations Watch) is an open-source, Android application that allows field workers to use mobile phones to document how well water pumps and sanitation points in the developing world are functioning, then transmit that data to create an online tagged map of target regions. (Source: Mobile Active)

Environmental sustainability also includes the use of renewable energy sources (solar and wind power, for instance) and reliance on other means to reduce the carbon footprint left on the ecosystem by man. Although the environment may not be the biggest priority of development professionals, who have more pressing issues to deal with (such as poverty, hunger, disease, etc.) its importance cannot be undermined because the poor are most vulnerable to environmental shocks, as recently witnessed by Pakistan and Brazil.

Information technology can step in by improving the distribution of low-cost alternative energy sources (such as Kopernik) and remote monitoring systems (similar to the one used in FLOW) can be used to curtail illegal mining, logging, fishing, poaching, etc. Lastly, disaster alert systems can be developed to alert inhabitants about approaching storms, floods, tsunamis and fires, and consequently, minimize damage to human property.

These ideas seem viable and appealing, to say the least, but it is vital to remember these solutions will fail if cultural contexts are not examined prior to implementation.

This post series drew inspiration from a UN Working Paper, Using Information and Communications Technology to Achieve the Millennium Development Goals.