Monday, March 17, 2008

Vikram Akula - Young Global Leader

Vikram Akula, CEO & Founder of SKS Microfinance has been recognized as a Young Global Leader by the World Economic Forum for his contribution ot the microfinance and empowering women living below the poverty line.

Other leaders in their field recognised this year included Queen Lalla of Morocco, actor Leonardo Dicaprio, CNN anchor Andersen Cooper, tennis legend Steffi Graf, Canada’s Environment Minister John Baird and recording artist Shakira.

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Waiver of Mass Debt (WMD)

The problem of rural debt in India was highlighted last month when the government used the budget to grant a $15-billion waiver to indebted farmers.

Vijay Mahajan from BasixIndia compares this step by the government to US and UK's basis of fictional threat on Iraq since it is based on "half-baked analysis of half-truths, but well designed to benefit thosebehind it".

"Apart from the gross inequity in the name of small farmers, the loan waiveris particularly inept as it completely fails to address the underlyingcauses of the Indian agrarian crisis -
1. Dwindling size of land holdings;
2. Low percentage of even protective irrigation; and where there was irrigation, tapering yields due to long years of mis-fertilisation and increasing level of pesticide resistance.
3. In dryland areas, no significant varietal improvements nor measures for coping with recurrent drought.
4. Increases in input costs, coupled with lower relative prices forproduce, and price fluctuation, has meant that agriculture is not very profitable even for commercial farmers. For small farmers, with imputed wages for family labour, farming does not even break even.

The same Rs 60,000 crore could have been used todrought proof 60 million ha of dryland @ Rs 10000 per ha, which would permanently secure the livelihoods of at least 3 crore of our poorer, farmers in rainfed areas."

He feels that the money should have atleast been credited to bank accounts of farmers.

"This would also have incentivised banks to open no frill accounts for 5 crore farmers who don't have a/cs as per the recently adopted national financial inclusion plan."

The mystery is:

"why did not the Left argue in favour of a more equitable waiver? Have they lost interest in the agrarian vote bank afterNandigram? Or is it a deal which we will understand many years later? "

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The Game Monopoly and Microfinance

The below is a short essay by Mike Lafleur is one of two winning essays from Développement international Desjardins (DID)'s DoingMyPart.Coop Youth Contest.

"Imagine playing a game of Monopoly but starting off with less than a dollar. Without access to any credit, each roll of the dice lands you into more debt and the cycle of poverty rolls on. Think of microfinance as the “Advance to Go” card that allows you to collect a small yet sufficient amount of money to invest in. For 2/3 of the world’s population living on less than a dollar a day, the “Advance to Go” card is their only viable option for breaking the cycle of poverty.

Microfinance creates partnerships that allow the poor to gain access to financial services, to move towards self-reliance, to build the capacity of local businesses and local knowledge, to foster entrepreneurship and to increase income, assets, security and hope. Inevitably, microfinance can serve as a cornerstone for better health, gender equality, improved education, empowerment and a poverty free world.

Whereas the economic term monopoly is defined as the domination of a market by a single provider, microfinance allows millions of providers to provide for themselves. Indeed there is a new game to be played!"

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Monday, July 09, 2007

Spandana, one of the top 5 microfinance institutions in India receives Rs.40 crores as equity investment from JM Financial India Fund. JM Financial India fund is a brokerage house of Morgan Stanley.

read more:

Equity investors expect various rates of returns from microfinance institutions- bellweather and aavishkar expect between 6-8% while smaller equity investors expect somewhere close to 30% returns. I don't know about the details of this deal yet but do look for updates.
Mobile devices like cellphones have the potential to effectively bring financial markets to the countryside, allowing banks and other lenders in urban areas to provide services like loans and savings accounts to a new population, according to a report by Vodafone and Nokia published last week.

Hughes said that Vodafone planned to create partnerships with traditional microfinance institutions, adding that it was testing a program in Afghanistan. "But the big one for Vodafone," he said, "is India," where the company recently bought the carrier Hutchison Essar.

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Sunday, July 08, 2007

John Wilson, director of Socially Responsible Investing at Christian Brothers Investment Services Inc. gives us ten reasons why not to invest in microfinance

#10 Social Justice? Who cares?

At the end of the day, financial returns matter as much as social returns. For broad access to social investment markets, financial performance has to be competitive with investment opportunities of similar risk and return profiles. MFIs need to understand the investor rationale.

The concept of a double bottom line is that there is a mix of profitability and a significant social component. At the end of the day, investing in microfinance is definitely better than giving out grants which have no financial returns at all. If investors did not want the social component in the investment, they might as well invest in the wall street rather than microfinance. Investments are coming into the microfinance market in India and investors do look for the quantifiable social improvements before they make the investment.

#9 We can't trade the securities.

MFI shares are not typically tradable in a liquid market.

The trend is changing. Do check the BRAC deal and also incorporation of microfinance specific investment banks like Grameen Capital India that are pioneering this effort. Also check the recent comportamos deal.

#8 We can't price them.
Nontradable securities do not have efficient pricing mechanisms and, therefore there is no way to report the net asset value of investments regularly (daily or even monthly) as required by institutional investors.

For the initial few microfinance securities it is definitely hard to price them. However, pricing will be possible once

#7 We can't legally own them.
The Investment Act of 1940 allows fiduciaries to invest in a range of investments that could include MFIs, given certain restrictions for different asset classes. Money market funds, for example, would be exempt. Bond and equity funds would be acceptable, though current practice
and other restrictions (e.g. daily valuations) limit the potential.

Not sure !!!!

#6 Theyre not entirely useful.

MFI investments do not fit traditional investment strategies. For example, MFIs will never represent more than a very small fraction of an asset manager?s portfolio (which typically range from hundreds of millions, to billions, of dollars), and thus do not help diversify portfolios.Managers need another reason to include MFIs in a portfolio (e.g., this asset classis uncorrelated with other markets). Also, since MFI investments do not match floating benchmarks, an asset strategy cannot be implemented in any case since their prices do not
fluctuate. It should be noted that the speaker also applied his comments to US-based ommunity Development Financial Institutions (CDFIs).

#5 They?re too risky.
The level of financial disclosure is not as formalized as in other types of
investments, and therefore it is much harder for an asset manager to
understand MFI investment risk. This leads to an exaggerated perception of
MFI default risk. This combines with already high perceptions of country
risk, currency risk, and various other risks plaguing developing country

Relatively less riskier than credit card payments. Repayment rates upto 99%

#4 Their ?guarantees? don?t guarantee enough.

There are different types of risk and the guarantees typically provided do
not sufficiently hedge against all the risk seen as inherent in MFI

We need folks like Grameen foundation to step in and they are ready to do it to some extent. Therefore the point on guarantee is untrue

#3 We are fiduciaries.
Fiduciaries have legal responsibility to maximize performance. Socially responsible fiduciaries are possible and legal because their investment decisions are based on financial returns that are not sacrificed for social return.

Not sure !!!

#2 We don?t have the expertise.
Investors don?t have in-house expertise. They either need to build in-house expertise or outsource this function. At a minimum, asset managers need information to gauge MFI investment performance relative to appropriate benchmarks. Any information supplier must have good credentials and proven analytical techniques. Professionals from the CDFI/MFI sector could serve this function well since they can answer the kinds of questions typically posed by fund managers.

Again, if there is a good business plan and several deals like comportamos, this can change.

#1 The great divide.
In most investment companies, there is an organizational and cultural separation between those who manage assets and those who apply social investment criteria. This is to avoid conflicts of interest between those screening investments and those managing assets. Investment managers are not compensated on social return, and hence have little incentive to incorporate
these strategies without an investment perspective. Most asset managers have an investment background and, coming from that perspective, believe in efficient markets. They assume that if MFI investments are not already desired by asset managers they are not valuable assets. The MFI professionals do not typically speak the language of asset managers, leading to confusion and difficulty working together and, ultimately, difficulty establishing the value of MFI investments. The key is to learn to speak the language of asset management and to devise products that fit an investment strategy as well as a social mission.

Not sure

The bottom line is market creation is necessary and the question is who is going to bell the cat?

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Aravind Virmani writes:

"Such a smart card could be programmed with identity (photo & biometric fingerprint), and have information on social (SC/ST) and personal/household characteristics. Each person/household’s entitlements could be in the form of specified subsidies for food/cereals, kerosene, midday meals, nutrition supplements, drinking water, toilet/sanitation services, basic drugs, schooling (primary/secondary), Internet access, electricity and a host of other items reflecting the dozens of subsidies and programmes currently in existence. The entitlement could be varied with and dependent on economic and social handicaps such as SC-ST, age (infant or aged), mental handicap, physical disability, female head of household, lactating mother, chronic illness, etc. "

For more:

Smart cards are being implemented in Bihar currently and an independent consultant, Chris Dev has shown to the government in Bihar that it can be successful through a pilot project. The population target in the pilot project were rat eaters who were the poorest of the poor. Chris Dev interestingly points out that the chief minister of Bihar found out from his sources about the pilot and immediately requested for a meeting. In the meeting, the technology was presented and the implementation was agreed upon. Amazing isnt it?

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