Tuesday, July 29, 2008

Nobel winner slams for-profit microfinance


July 28, 2008: 03:45 AM EST

Microfinance summit debates perils of profiting from poor; Nobel laureate against it

NEW YORK (Associated Press) - When Nobel Peace Prize winner Muhammad Yunus began making $27 loans to women in Bangladesh three decades ago, he never dreamed of initial public offerings, return on equity and securitization.
Those terms weigh heavily on his mind today, as the once-charitable field of microfinance has become increasingly commercialized.
"Poor people should not be considered an opportunity to make yourself rich," Yunus said by phone from Bali, Indonesia, where he is attending a microcredit conference, which opened Monday.
The debate likely to rage this week at the Microcredit Summit Campaign conference, a gathering of some 3,600 microfinance institutions and heads of state, including Indonesian President Susilo Bambang Yudhoyono, pits privatization advocates against those who believe you can either save the world or make a buck, but not at the same time.
The pro-market faction argues that civic-mindedness alone will never draw enough capital to serve the estimated billion people who want but don't have rudimentary banking services. They also say that to be sustainable, institutions must be profitable.
Those against commercialization, like Yunus, fear the movement, born of a desire to rescue the poor from loan sharks, is losing its soul, prioritizing investors over the world's farmers, sheepherders, and 'telephone ladies,' many of whom struggle by on less than a dollar a day.
Either way, microfinance is booming. According to Deutsche Bank, the volume of microfinance loans hit $25 billion in 2007, up from $4 billion in 2001, with another $250 billion still needed. The bank expects that private investors, drawn by the sector's social mission, stable returns, low default rates, and potential as a diversification play, will be pouring $20 billion into micro-finance institutions in 2015 -- ten times more than they did in 2006.
Many groups that started as non-profits have become for-profit enterprises, and a plethora of microfinance investment funds, targeted at institutions and individuals, have opened in the last few years.
Citibank, Credit Suisse, Deutsche Bank, Morgan Stanley, and India's ICICI have all entered the microfinance market, either providing direct funding, backing investment funds, or securitizing debt. Private equity investors, including Sequoia, Blackstone Group, Carlyle Group, and Dubai's Legatum, have also piled in, according to the World Bank's CGAP, a microfinance research group.
"It's a big business," Eric Savage, Managing Director of Unitus Capital, a new for-profit firm that will help microfinance groups raise capital, said by phone from Bangalore, India. "You are seeing more and more financially-driven investors going into this market."
As that happens, greater transparency is "critically important," he said. It's the only way to attract capital, and most micro-lenders don't publish standardized annual percentage rates, which can confuse borrowers, he said.
Savage, a former investment banker, said the sub-prime crisis may give microfinance a further boost as investors seek diversification. "The microfinance sector has been relatively isolated from the global credit crisis," he said.
Tightening credit, as banks impose stricter lending rules, has so far had a "quite muted" effect on loans to microfinance institutions, he added.
At least two microfinance institutions are publicly traded: Mexico's Banco Compartamos, S.A., and Kenya's rapidly-expanding Equity Bank Ltd., which on Thursday reported 197 percent profit growth for the first half of the year.
More are making their way to market.
The Compartamos IPO, in April 2007, was a watershed event. The bank raised $474.7 million -- and the hackles of the field's civic-minded pioneers, who say the bank is making indecent profits by charging too much interest.
On Friday, Compartamos reported that net income for the first half was up 13.9 percent, to 500 million Mexican pesos ($49.5 million), over the same period last year. Return on equity fell 11.3 percent, to 39.2 percent.
Compartamos founders Carlos Danel and Carlos Labarthe, argue that microfinance is, first, finance. In an 11-page "Letter to Our Peers," published this year, they argued that high interest rates are needed to cover the cost of administering small loans in difficult markets.
They defended their above-average profits as necessary to attract investors to the still-nascent field, and said they support increased transparency. Competition, they wrote, is already helping the poor: In the past 7 years, Compartamos' interest rates have dropped from 115 percent to 79 percent.
And clients keep coming.
Many, however, remain galled by what Yunus, who won the 2006 Nobel Peace Prize, calls the "distortion" of the field he forged.
The pioneering bank he founded, Grameen, is owned by the poor borrowers it serves, and sustains itself with local deposits. The bank, which hasn't used donor money since 1998, reported a narrow profit of Taka 106.91 million ($1.56 million) on revenues of Taka 10.64 billion ($155.05 million) in 2007.
Such charity, Yunus said, "shouldn't tickle people's greed."

Friday, July 25, 2008

Borrowers face high home loans charges


Written by Morris Aron
Building under construction
July 25, 2008:
Mortgage players are likely to increase their interest rates should the liquidity crunch and rising inflation trends persist, market players have said.

Already, Commercial Bank of Africa has indicated that it will increase its base lending rates by 1.5 per cent from 14 per cent to 15.5 per cent as from August 1.

Some players in the market however maintained that, stiff competition in the home loans industry will delay such revision.

“Any financial institution — particularly mortgage lenders— contemplating revising interest rates will have to tread carefully lest they make a wrong move based on temporary economic situation,” said Beatrice Maingi, the general manager of Stanchart’s secured lending division.

But as the debate on which direction interest rates are bound to go, borrowers for home loans stand to suffer the most due to the structure of their loans, which are to be paid for more than 15 years compared to ordinary loans that last for between two to five years.

For example, if a bank raises by one per cent the interest rate on a mortgage loan of five million shillings— the average price of a middle income house in Nairobi — the borrower will be forced to pay an additional Sh50, 000 per year for the rest of the rest of the payment period, unless there is a downward revision of interest rates.

The head of marketing at CBA Chris Pasha said the increase in base lending rates will affect all products but the final pricing of mortgage loans will be determined at a later date.

Other financial institutions are reportedly waiting for this month’s inflation figures from Kenya National Bureau of Statistics to decide on the direction of interest rates.

Ms Maingi told the Business Daily that as the high inflation rate scenario unfolds and liquidity crunch continues unabated, financial institutions are keenly monitoring the situation with a possible reaction.

“The situation warrants a careful study of the market with a possible review of interest rates,” said Ms Maingi.

Commercial banks are sending strong signals that should the current economic conditions persist and begin to eat into bottom lines of companies, revision of interest rates may be inevitable.

Bankers say that mounting pressure for higher interest rates is the result of high inflation and liquidity crunch that has increased the cost of doing business.

John Wanyela of the Kenya Bankers Association recently told the Business Daily that the pressure is arising from inflation rates that are way above the Central Bank’s target — a clear signal that the prevailing economic conditions are beyond CBK’s control.

Official statistics indicate that the overall 12-month inflation stood at 23.9 per cent in May with the underlying inflation at 2.2 per cent above CBK’s benchmark of five per cent.

But even as inflation continues to bite, other players frown at the rush by some banks to increase interest rates.

Joram Kiarie, business manager at Savings and Loan—the mortgage subsidiary of Kenya Commercial Bank — said any increase in interest rates should be guided by much more market data and not merely inflation rates and liquidity crunches as such phenomenon are known to be temporary.

“Increasing interest rates on credit facilities should be looked at carefully because some products like mortgage loans are long term and their interest rates are arrived at based on a thorough analysis of market trends and a forecast in the long term,” said Mr Kiarie.

Building under construction
Mr Kiarie says that what the economy is experiencing is similar to the situation that prevailed three years ago after the KenGen IPO. This was a scenario where a few banks, that acted as receivers of the IPO, ended up holding too much money at the expense of the others. Mr Kiarie predicts that the crunch will ease off as Safaricom IPO refunds flow back into the mainstream economy.

In the same tune, CBK has sought to calm the nerves of commercial banks with a rider that there is no cause for worry as the situation is expected to ease off once money in possession of four commercial banks that received Safaricom IPO funds are channelled to the mainstream economy. So far, four billion shillings of the Safaricom refund has not reached investors.

CBK has also been quoted in the past saying that inflation rates in the economy could not be captured fully and that no intervention to address inflation will be carried out until the Safaricom IPO refund process is complete.

However, revelations that the refund process is almost complete with only four billion shillings remaining to be disbursed and that Treasury is holding Sh51 billion from the proceeds of the Safaricom IPO has thrown the liquidity crunch and high inflation debate into murky waters.

A section of market players argue that to ease the crunch, Treasury should release the money back - throw the planned budgetary spending - to the mainstream economy as a solution.

If mortgage financiers review their rates, Standard Chartered —one of the mortgage companies with a fixed rate mortgage (FRM) product— stands to win pricing wars but lose out on profit.

Under Stanchart’s fixed rate mortgage launched a couple of years ago, interest is charged on mortgage remains stable for five years even if underlying interest rates are revised upwards.

Most of other mortgage companies have adjustable rate mortgages (ARM), that are tweaked regularly to reflect movements in the market rates.

Mortgage financiers Housing Finance and S&L told Business Daily that they are not contemplating any increase of interest rates on their mortgage products.

Stanchart says, it may consider the move if the trend is left unchecked while other players like CFC Stanbic, I&M chose to remain silent on the matter. CBA however says that, the situation might be temporary, but even then, they have to respond to economic situations.

“We have raised our base lending rates, if the factors surrounding the liquidity crunch and high inflation rate eased then we will also reduce our interest rates,” said Pasha.

Monday, July 21, 2008

Microloans Foster Entrepreneurship in Poor Countries

Microloans Foster Entrepreneurship in Poor Countries

18 July 2008

In many developing countries, micro-financing has created possibilities for burgeoning entrepreneurs who would not have found funding before. VOA's Barry Wood reports that special attention is now being paid to female entrepreneurs, who have had to overcome cultural barriers to get financing. (Part 3 of 5)

The Grameen Bank in Bangladesh is a ground breaker. It lends almost exclusively to women. And its small business loans are almost always paid back.

Nobel Prize-winning Standard

Mohammed Yunus
Muhammad Yunus
Muhammad Yunus is the bank's founder and a hero in his country. Grameen was the first to lend on a grand scale to poor, aspiring entrepreneurs in the developing world. The venture into microcredit won Yunus and his bank the Nobel Peace Prize in 2006.

"It's fantastic news. We are all very excited about the good news. It excites everybody in Bangladesh and also the people who are involved in micro-credit around the world," Yunus said.

Melissa Carrier, at the University of Maryland, says Grameen's micro-financing has expanded the concept of entrepreneurship.

"Certainly Grameen Bank has given legitimacy to those kinds of micro-loans to local villagers," she noted. "And so the idea of entrepreneurship now is about doing for yourself. It's about raising chickens, and having cows, and knitting scarves and being able to feed your family."

Microlending in Kenya

Margaret Okoth
Margaret Okoth
Margaret Okoth runs a market stall in Nairobi, Kenya. She is benefiting from low-interest micro-loans from her village cooperative.

"(The cooperative) has recently increased its limit so that you can borrow 80,000 (shillings)," she said. "And if you take out that big a loan you'll really see your business grow."

In Kenya's post election violence, Okoth's stall was destroyed. But coop loans allowed her to rebuild - and also balance her business with her other job, as a wife and mother of 12.

Now, the Grameen model is being promoted by big lenders like the World Bank, in its discussions with developing countries.

African Issues

Micro-credit can help women like this one, at a market in Sao Tome
Micro-credit can help women like this one, at a market in Sao Tome
Dahlia Khalifa is a business specialist at the World Bank's International Finance Corporation. She says women in African countries face special issues.

"Often times we've seen, and there has been some research done especially in African countries, that women are not given the same consideration as men when they apply for a loan," she said.

That was the case in Egypt. Hoda Galal Yassa is one of Cairo's leading female entrepreneurs. She says women in the Arab world face a formidable barrier.

"Everybody looks at a woman...as a good secretary, a good assistant, maybe she can cook very well and make something from that," she said. "But to be a business woman, particularly in the industrial field, it wasn't easy or accepted easily by men."

Yassa started her detergent and other factories with funds from family members.

Women Face Challenges

Elaine Allen
Elaine Allen
Elaine Allen, a professor at Boston's Babson College, says access to capital remains the biggest obstacle female entrepreneurs must overcome, especially in Africa and the Middle East.

"Culturally, they (women) are not able to go into banks and deal with men," she noted. "That is a cultural barrier. And what we're seeing is that micro-finance is one way to get around this. And also we have recommended that banks there (in Africa) hire women."

Discrimination against women goes even further, says Dahlia Khalifa of the World Bank.

"In many jurisdictions, we're sometimes finding that women are treated as legal minors, or they're not able to be a full signatory to a contract, or to represent themselves in court," she said.

Overall, the situation is improving. Men and women entrepreneurs are finding ways to obtain capital. And some governments are beginning to take action to make it easier to do business.