By Matt Gamser and Paul Lee
A new wave of financing innovations is democratising access to capital, especially for those most vulnerable among small, medium and micro-enterprises (SMMEs). Are governments and large financial institutions ready to embrace these innovations and enable the necessary regulatory reforms to support the growth of entrepreneurs across Asia?
Raising capital has always been one of the greatest challenges for the growth and sustainability of SMMEs. The International Financial Corporation estimates that the total unmet need for credit by SMMEs globally ranges from US$2.1tn to US$2.5tn. In East Asia alone, the credit gap is a massive US$900bn to US$1.1tn.
How do you bank the “unbankable”? The question could hardly be of more importance to small businesses in emerging markets, an estimated 200m of which are starved of the finance they need to grow.
One somewhat unlikely – but increasingly popular – answer is through psychometric tests. By yielding profiles of loan applicants’ honesty, intelligence, aptitude and beliefs, the tests facilitate lending to otherwise “unbankable” borrowers who do not possess a credit history, collateral or accounts.
Artful questions are key to the tests’ efficacy, say finance executives and industry experts. For example, if you want to assess a prospective borrowers’ honesty, it would be naïve to simply ask if they are honest, or if they prize integrity.
Grameen Bank, founded by the pioneer of microfinance, Muhammed Yunus, has become a political football in Bangladesh. Yunus resigned from the globally-renowned Bangladeshi microfinance lender in 2011 over his age after a government campaign to remove him. Yunus – who had talked of starting a political party – has remained influential despite his removal from the board.
Now there are reports that the Bangladeshi government is pushing to take majority control of the bank – and Yunus’s supporters are up in arms.
Peru’s Grupo ACP, the non-profit majority owner of Mibanco, has continued its aggressive regional expansion with the opening of its first bank in Mexico.
Forjadores de Negocios, a Mexican microlender targeting women, opened its doors as a bank for the first time this month, with ACP as a majority shareholder.
Grameen Financial Services, the prominent Bangalore-based microfinance institution, announced this week that it has raised Rs532m ($9.7m) in its third round of equity funding.
It’s a small amount of money in comparison with India’s needs for retail credit financing. But it’s a big vote of confidence that will boost recovery hopes in the scandal-hit microfinance industry.
When Palaniappan Chidambaram, India’s finance minister, presented his budget on Thursday there were elements that moved markets and elements that analysts and economists pounced on.
But there was only one element that provoked any reaction from Sonia Gandhi, the leader of the Congress party, who appeared largely bored by Chidambaram’s speech. This was a proposal to set up a public sector bank especially for women.
Two years ago, the world of microfinance was plunged into crisis by a wave of suicides among poor people in rural India unable to pay their spiralling debts. In the worst hit areas, lenders including SKS Microfinance, India’s only listed company in the sector, were ordered to halt operations.
Not all the problems have been solved. But confidence is returning and several deals have been done this year, as the industry responds to its challenges through consolidation. The latest and by far the biggest deal is Thursday’s announcement of a $105m acquisition of Boston-based Accion Investments by Bamboo Finance of Luxembourg.
Shares in SKS Microfinance, India’s only listed microfinance company, rose 10 per cent on Tuesday to Rs143 ($2.86) as investors bet new regulations would help it build business.
But the price rise doesn’t do enough to recover steep losses over the past month, after a widely-distributed Associated Press story revived accusations of involvement of SKS employees in a wave of suicides among insolvent borrowers. And the shares are at barely more than a tenth of the Rs1,400 they hit on a wave of investor confidence that followed the company’s IPO in 2010. SKS said the AP story was “baseless”.
Emerging markets look set to benefit from a fast-growing interest in niche investment opportunities, not least in microfinance.
FTfm reports Oxfam GB is to launch its first-ever investment fund, teaming up with Symbiotics, the Swiss microfinance specialist, to launch the Small Enterprise Impact Investment Fund. The fund will invest in financial intermediaries with a mandate to support small and medium-sized enterprises in Africa and Asia.
SKS Microfinance, India’s only listed microfinance company, is looking raise around $183m in a share sale later this year.
But given the trouble the industry has gone through – public outcry forced the government to crack down on lenders after several struggling borrowers committed suicide – are investors ready to jump back on the microcredit bandwagon?
For months, the Bangladesh government has waged a bitter battle against Nobel peace prize-winning economist Mohammad Yunus – a course of action that many have warned would hurt Bangladesh’s international reputation.
As supporters of Yunus in the US congress issued fresh appeals on his behalf this week, is it possible Bangladesh authorities are finally waking up to the potential consequences of their campaign?
India’s microlenders breathed a sigh of relief on Wednesday as the country’s central bank made recommendations to set new lending rules, after months of sporadic clampdowns and general uncertainty about the industry.
Shares in SKS Microfinance, one Indian lender which has taken a particularly hard hit in the markets, shot up 13 per cent on Thursday in response to the news.
In this FT video, Amy Kazmin, south Asia correspondent, talks to Vijay Mahajan, president of the Microfinance Institutions Network, about the challenges the micro lending industry faces. Thursday’s FT also has a big analysis of controversies in the microfinance sector.
For nearly a month, India’s beleaguered microfinance companies have faced intense interference from local government, police and opposition politicians in the state of Andhra Pradesh. The interference has hindered the collection of outstanding loans – a potentially-disastrous situation for the companies, given that the state accounts for a third of their $6.7bn portfolio in India. Now the industry is anxiously waiting to see whether the hostile mood continues – or whether it can get back to business.
Rahul Gandhi, the presumed heir to India’s Congress party, may be media-shy, but he already enjoys a quiet, behind-the-scenes potency. And in India today, very little seems to escape association with him.
So it is with the microfinance crisis rocking the southern, Congress-ruled state of Andhra Pradesh. After several struggling micro-borrowers committed suicide, public outcry forced the state government to rein in lenders. Now some microfinance executives are arguing the crisis is politically motivated, designed to embarrass the young Gandhi.