https://dailyasianage.com/news/180293/socially-responsible-investment-and-mfi
EDEN BUILDING TO STOCK EXCHANGE Published: 02 June 2019
Socially responsible investment and MFI M S Siddiqui The MFI are running in a stage of ever expanding demand for microfinance and shortage of funds from traditional sources. There is of course no single optimal capital structure for an MFI. The decisions on funding structures for the individual optimal funding mix is in practice based on a variety of determinants. On the one hand, internal factors such as growth of loan portfolio and savings mobilization and external factors such as the regulatory framework, the availability of donors and commercial lenders and, lastly, the development and openness of the internal financial system are very important factors. It would be desirable that MFIs to primarily refinance themselves from domestic funding sources, either through national deposit-taking or accessing local capital markets by issuing bonds or equity. After all, microfinance is a response to the underdevelopment of the financial sector in a developing country. The ultimate objective of developing financial markets in emerging markets and developing countries is to mobilize domestic financial resources and to enable domestic investors to efficiently draw on domestic savings. Ultimately, in the course of such a development, the role of foreign private sector investors in MFI financing would gradually change from providing direct loans to MFIs via structured debt instruments or funds toward increasingly investing into a MFI's domestic bonds or shares. Traditionally the funding structure of an MFI has followed a certain pattern over its life cycle. While start-up MFIs are characterized by a larger dependency on donations usually made in the form of equity grants, donations and technical assistance, the more advanced MFIs tend to display a higher debt leverage through domestic or foreign borrowing; over time some even evolve into more formalized financial institutions (e.g. non-bank financial institutions) or even regulated MFIs such as niche banks. The larger MFIs have been able to secure funding from both foreign investment and International Financial Institutions (IFIs) and socially responsible private funds. MFIs have two key characteristics: (a) it is a financial organization providing loans and financial services to low income customers; and (b) it seeks both a social as well as an economic return. At the present context of high demand of microfinance and shortage of funds, MFIs need to stop relying on subsidies to finance their operations and lending activities, if their intent is to establish to meet the demand of the market. A majority of the current MFIs started as non-profit nongovernmental organizations (NGOs) and have now become semi-commercial units that look at both economic and social returns.
MFI should be now commercial viable to attract investment from home and abroad. Commercially viable MFIs need as a result to literally make money out of the poor, which is not in conflict with the original intent of MFIs. The socially concerned investors in western world are now massively investing in the developing world in commercially viable MFIs. BRAC and Grameen Bank, Gonoshastha Kendro (GSK) are example of such MFI invested in socially responsible business. Some of the MFIs such as ASA and Gonoshastha Kendro also initiated different type of income generating project like University. These semi-commercial activities also branded Social business. Dr Mohammad Yunus is now branding it throughout the world with his efficient manner. Socially responsible investments (SRIs) rank high on investors' agenda. Investors attach to the social and environmental consequences of their investments. Amongst the great variety of SRIs, investments in micro finance have recently started to increasingly attract institutional and individual investors. On the other hand, private-sector investors increasingly appreciate microfinance investments for their dual nature: First, they allow investors to adopt a social investment strategy geared toward poverty alleviation and social development in developing countries. Second, they simultaneously offer an attractive risk-return profile that is marked by largely stable financial returns, low credit default rates and low correlation to the mainstream financial assets as well as the general domestic economy. Philanthropists and socially responsible investors expect new financial instruments that allow for the maximization of the social return. There is a new form of funding such as debt issuance or public equity offerings are allowing MFIs to approach the business model of commercial banks, that utilize the capital markets to raise both debt and equity. By approaching banks' business models, MFIs will be in a better position to tackle the challenge of offering a wider range of services to the poor, that need financial services as much as they are needed in the first world. To tape the huge fund from socially responsible investors, NFIs also enlisting in capital market public company. The reasons are that, on the one hand, some microfinance institutions have begun to explore new funding opportunities, e.g. by securitizing microfinance loan portfolios. The advantages of the transformation process are manifold. First, the sheer size of the microfinance industry has reached a point where subsidized loans are no longer sufficient to cover the funding needs. By becoming regulated, MFIs are allowed to take deposits which broaden their funding structure and, ultimately allow them to expand their lending business. A part from deposits, debt financing usually comprises both subsidized and commercial borrowing from a large variety of domestic and foreign sources that range from (international) development agencies and social investors to quasi-commercial and commercial lenders. There are two main types of foreign investors that provide the lion's share of foreign funding to MFIs. These are international financial institutions (IFIs), which include bilateral or multilateral development agencies such as the World Bank and the European Bank for Reconstruction and Development. On the other hand, a range of private investors made up of NGOs, individual donors, foundations, individual and institutional investors has evolved whose investments increased even more rapidly than those of IFIs, reaching an estimated USD 2 bn at year-end 2006.Among the largest vehicles, ProCredit is reported to have the largest loan portfolio16 of around EUR 757 m followed by the EuropeanFund for Southeast Europe with EUR 245 m.
One of the few examples is the Mexican MFI BancoCom partamos that went public in April 2007. Compartamos was originally founded as an NGO in 1990 and, in early 2006, served around 600,000micro-clients. On the whole, the IPO was well received by capital markets with the issue being over-subscribed 13 times on an initial price to book ratio of 12.8 and an initial price-earnings ratio of24.2.17 Other examples include the IPO of the Equity Bank in Kenya which became listed on the Nairobi Stock Exchange in 2006.Direct access to capital markets through debt instruments mainly comprises the securitization of MFIs' loan portfolios. The first securitization transaction was conducted in India by ICICI. Meanwhile, securitization constitutes a more frequently used instrument by MFIs to access domestic and international capital markets for funding; e.g. in 2006 BRAC securitized receivables in microfinance worth USD 180 m. The Netherlands Development Finance Company (FMO)bought one-third of the transaction and another third was acquired by Citibank; this tranche had an additional guarantee by FMO and KfW. The remaining third was purchased by local banks and Citibank Bangladesh. In total, the issuance provided funding to BRAC over a period of six years in a stream of six one-year notes. There are many examples include the true sale securitization of the loa nportfolio of ProCredit Bulgaria in May 2006 that initially comprised EUR 47.8 m and has a target issuance volume of EUR 150 m. This transaction is backed by a guarantee from KfW and the European Investment Fund for the senior note and was arranged by Deutsche Bank. In March 2007, ProCredit Serbia accessed the international public bond market by issuing a EUR 125 m senior loan participation note with a coupon of 6% and a maturity of five years. The success story of BRAC and Grameen Bank is socially responsible commercial ventures are very successful in the market. They have also successfully attracted overseas investments and formed joint ventures projects. Other MFIs like Dustho Shastha Kendro (DSK), ASA, Nijera Kori etc can initiate reform in their structure to attract overseas investment with equity and deposits etc. They may consider some 'social business' which is already successful in Bangladesh. A large member based and reputation of the MFI is their major strength. They only needs reform in policy and management.
The writer is a legal economist. Email: mssiddiqui2035@gmail.com