Xavier Reille

There are vibrant debates in the press and online about how to reform Middle Eastern and North African (MENA) economies in the wake of the Arab Spring. There are very different views on how to build a more equitable and inclusive growth model for regional economies. But from right to left, from Islamic parties to secular ones, and from academia to the private sector, there is agreement on one thing: the region urgently needs to create more jobs to meet the demand of a quickly growing labor force and micro, small, and medium enterprises (MSME) are part of the solution. Read the rest of this page »

By market standards, the SKS IPO is a great success. Institutional investors have over-subscribed their allocations by 13 times, and the company’s valuation of USD 1.5 billion came in at the top end of the offer band price. 

This sky high valuation represents 6.7 times the company’s post issue book value, and about 40 times the company’s fiscal year 2010 earnings.

Such multiples are not in line with market peers. In emerging markets, banks are valued at 3 times the book value, while finance institutions serving low-income customers are trading at 2.6 times the book value. The SKS valuation is even higher – by a margin — than Compartamos’s valuation in its landmark 2007 IPO. At listing, Compartamos was valued at 27 times the company’s historical earnings although its 2006 return on equity (ROE) at 55% was more than double the ROE of SKS today. 

Earning prospects at SKS are attractive, but on their own don’t justify such a high valuation. On the positive side, SKS still has a lot of room for growth. It has ambitious plans including offering new financial products, distributing goods and services beyond microfinance at the bottom of the pyramid, and transforming into a universal bank. But there are clouds on the horizon. Portfolio yield might stagnate as increased competition and political scrutiny put pressure on interest rates. The cost of risk will likely go up in the absence of a well-functioning credit bureau. Transaction costs for group lending will also increase as SKS focuses its growth on underserved, harder-to-reach clients and states.

So what might explain the unrealistically high valuation? This “irrational exuberance” in the SKS IPO price is probably due in part to excess capital flow. It reflects strong institutional investor interest in microfinance combined with the dearth of publicly-traded microfinance securities. Investors are seeking more exposure to emerging markets and to alternative assets. They are eager to buy into the microfinance story and with only two pure microfinance institutions listed, prices are getting ahead of fundamentals.

One of my concerns is that investors buying at such a high level may pressure management to increase profitability, at the expense of clients’ interests and long-term company sustainability. There is indeed a risk that a focus on short-term profit and quarterly earnings might overshadow—if not clash—with the social mission of SKS. True, this did not happen in the Compartamos case (the company did not become more “commercial” after its IPO) but there is still a risk.

What does appear likely is that someone is going to lose as, over time, the SKS valuation should come in line with global standards. Will it be the latecomer investors who bought too high? Or will it be clients as the institution prioritizes profit maximization? And what about possible broader ripple effects? Unmet expectations might make it harder for other MFIs to go gain the confidence of the public markets.

Xavier Reille

I discovered a new microfinance giant.  The newly created Postal Bank of Morocco is the largest microfinance provider in the country: it offers payments and transfer and saving services to 4.5 million low-income clients and boasts 90% of the domestic transfer market thanks to its flagship product the “mandat poste”.
 
It has ambitious goals for financial inclusion.  Its business plan aims at bringing 2.5 million more clients into the financial system over the next five years.  This is more than twice the current outreach of all the MFIs in Morocco. So, can it succeed?
 
The Postal Bank is a subsidiary of the country’s postal network and was granted a full banking license in late 2009. It has a unique network of 1800 branches spread out among all Moroccan districts including the most remote ones. It has a very low cost structure with access to cheap deposit funding and affordable staff resources. Remarkably, it has talented senior managers all coming from commercial banks.  The bank plans to offer credit services soon, but management admits they lack the expertise in credit underwriting, so they will partner with experienced credit companies. The bank will first launch a consumption credit product with SOFAC, a leading consumer lender. They are also contemplating  offering housing loans and microenterprise loans through partnerships with MFIs.
 
Obviously the new Postal Bank also has its challenges. The quality of service at the branches is poor and the staff lacks training and good incentives. The MIS is obsolete and as much as 30% of the reported accounts are dormant.
 
Yet the Postal Bank of Morocco has an exciting new vision for financial inclusion, a first class management in place, a bank license, and a unique delivery platform for financial services. This shows the great potential for countries to leverage their postal networks to advance financial inclusion.

Bienvenues les  Banques Postales!

In a recent post David Roodman questions the role of funders and particularly lenders in the microcredit delinquency crises in Bosnia, Morocco, Pakistan, and Nicaragua. The exuberant growth seen in these four countries was indeed fuelled by lenders eager to place capital.  A Bosnian MFI manager was blunt: “Some funders started lending to second and even third tier MFIs.  They just dumped the money; they did not look at the market at all.” Why did these lenders take such risks?

Microfinance investors, asset managers, and maybe rating agencies have tended to underestimate MFI risk for a long time.  But maybe regulatory issues form part of the problem?

Read the rest of this page »

This is one of those one million dollar questions present at many microfinance forums. A CGAP and JPMorgan report on equity valuation in microfinance in the context of the financial crisis is shedding new light on this debate. Based on our admittedly limited dataset of 21 private equity transactions, MFIs in India are trading at 5.9 their historical book value or close to 3 times the world average. So, are MFIs in India overvalued?

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At an investors’ conference two years’ ago, microfinance* was presented as a promising untapped market at the bottom of the pyramid with a market penetration of only 1% and a funding gap of USD 250 billion.

The recent delinquency crises affecting Bosnia and Herzegovina (BiH), Morocco, Pakistan and Nicaragua described in our new Focus Note “Growth and Vulnerabilities” paint a different picture. Too many–not too few–microcredits seem to be the problem in these markets.

Read the rest of this page »

There’s lots of talk about the delinquency crisis in Nicaragua, Bosnia, and Morocco these days. But what is really happening in these countries? What is the origin of these crises and what are the lessons learned for the industry? I’ve been looking at the situation in Morocco.

Microcredit in Morocco has enjoyed one of the most extraordinary growths seen in the microfinance industry. In just four years, from 2003 to 2007, MFI loan portfolio multiplied 11 times and client outreach by four, according to MIX. This exuberant growth was driven by four leading MFIs. These institutions scored remarkably well on all microfinance performance metrics, including scale, depth of outreach, asset quality, and profitability. These impressive results did not go unnoticed, and Al-Amana and Zakoura were awarded several international prizes.

In 2007 some signs of stress—notably loan delinquency and a significant increase in the number of multiple loans clients took on—started to emerge.  A sharp rise in nonperforming loans took place in 2008 and affected all MFIs. PAR 30 increased significantly to 5 percent in December 2008 and reached an alarming level of 10 percent in June 2009. Write-offs also increased dramatically with a negative impact on MFI profitability and solvency. In May 2009, Zakoura, one of the Moroccan flagship institutions, reported a PAR 30 of over 30 percent and decided to merge with another MFI, Fondation des Banques Populaires

The causes of the delinquency crisis are well known and can be summarized in two words: unsustainable growth. The Morocco microfinance sector wasn’t a casualty of the global financial crisis: this was primarily a crisis of the MFIs themselves. Unprecedented growth had overstretched MFI capacity, translating into lenient credit policies, obsolete management information systems (MIS), lack of internal controls, and substandard governance. Multiple lending to the same clients was also an aggravating factor.

Moroccan MFIs are putting in place aggressive turn-around plans, and a recovery is expected for 2010. A new and more mature microfinance sector is emerging with a well functioning credit bureau and improved risk management systems.

But what’s at the root of these problems? Why are MFIs in Morocco and elsewhere being pushed to grow beyond their institutional capacity? Are the funders or the MFI managers to blame? Have we become obsessed with outreach, at the cost of quality and long term sustainability?

A couple of weeks ago, I attended a very interesting roundtable on the risks landscape and outlook of the microfinance sector in India for 2009. It was organized by CGAP and Intellecap and held in Mumbai. This was my first visit to India in 21 years, and it was a unique opportunity to discover the microfinance scene. Read the rest of this page »