January 25

James Militzer

A Tale of Four IPOs: Is Public Investment in Microfinance Becoming OK Again?


Initial public offerings have long been a controversial topic in microfinance, and rightly so. The IPOs of Compartamos in Mexico and SKS Microfinance in India, in 2007 and 2010 respectively, made a lot of money for investors and turbocharged the sector’s growth. But they also sparked hyper commercialization and debt crises that rocked the industry, gravely harming its clients and tarnishing its public image.

But last year, two Indian MFIs, Equitas Holdings and Ujjivan Financial Services, had successful IPOs that have garnered a much more positive reception in the financial inclusion community – while also bringing in some major funding. We spoke with Daniel Rozas of the European Microfinance Platform and Anna Kanze of Grassroots Capital Management about how these four offerings differed, and what these differences could mean for the future of public investment in microfinance. You can listen to the interview in the podcast above, and the excerpts below give a sense of the conversation. And on Monday, Jan. 30, we’ll be discussing these topics in more depth in NextBillion’s first Twitter chat, featuring Kanze, Rozas and Microfinance Transparency founder Chuck Waterfield – join us at 10:00 AM EST at #MFICHAT.

According to Kanze and Rozas, the first big difference between the two sets of IPOs was their motivation. As Rozas described it, one of the explicit goals of these early IPOs was based more on public relations and industry-wide strategy than on business need: to demonstrate the attractiveness of microfinance as an investment. “Yes, they needed capital to grow, and yes, they were of the size at which point an IPO was a logical way to get that capital. But in the case of Compartamos, if I remember right, I don’t believe they were actually raising any capital at all. It was just a vehicle for existing investors to exit and sell their shares. In the case of SKS, they were both raising capital and providing an exit for existing investors. And a lot of this was framed in the way of bringing the commercial market to microfinance, and saying this was a major milestone in the development of the sector.” On that count, he said, the IPOs were a success. “If you look at microfinance in Mexico after the Compartamos IPO, it exploded. There were lot of new entrants who came in, a lot of big money started new MFIs.” But unfortunately, along with this new money came new pressure to deliver returns – and not just among SKS and Compartamos.

The Compartamos IPO led to high interest rates that sparked industry-wide soul searching, with Muhammad Yunus comparing the MFI to loan sharks. “And many of the industry efforts to define appropriate or responsible investing, to define principles for protecting clients – those really arose after that … not immediately, but in the next few years,” Rozas said. And in India, the SKS IPO “pushed it to grow to a level that is really not possible, given its size, without becoming essentially an irresponsible lender.” It also impacted its competitors, creating “a level of competition, especially in Andhra Pradesh, that was unsustainable and led to over-indebtedness. … The IPO drove that reckless growth, and if you look at the statements of the heads of the other major MFIs in Andhra Pradesh, they were all also expecting to have an IPO within one to two years after SKS, and it was a question of who was next. … And I would say that the crisis in Andhra Pradesh, where the government essentially prohibited microfinance, wouldn’t have happened without the SKS IPO, which happened three months before. This was a major factor in that picture, in that juxtaposition of the shareholders in SKS walking away with millions, and some of its poor clients committing suicide. It was the worst possible picture.”

In contrast, Kanze said, Equitas and Ujjivan took a lower-key, socially focused and business-driven approach. They had a mix of social investors and more traditional private equity investors, and “they made it very clear that their social mission was core to their companies’ operations and their corporate culture – I think all their investors knew that going in. … Just comparing Compartamos and SKS to Equitas and Ujjivan, the latter were under two times book value, where Compartamos was close to 13 times book value, and SKS was four times. So that’s to say that the Equitas and Ujjivan prices were a little bit more reasonable, indicating that they wouldn’t be growing uncontrollably, or maybe charging high rates to their customers to create these profits that were unsustainable.”

But Indian regulations also played an interesting role in Equitas and Ujjivan’s approach. First, as Kanze described it, “The regulations had changed after the 2010 crisis, where it wasn’t really possible to charge high interest rates – interest rates were regulated.” What’s more, she said, both Equitas and Ujjivan were prompted to pursue IPOs in the first place because the government limited their ability to go beyond traditional microloans to offer other loan and savings products to their extensive client bases. To get past those limitations, both MFIs had received approval from the Reserve Bank of India to become small finance banks, a new designation that allows them to take deposits from clients, among other benefits. But regulations require small finance banks “to reduce their foreign shareholding below 50 percent. And given that most Indian MFIs already have a lot of private equity investment, they are really unable to do this through domestic private equity alone. So going through the IPO process is one of the only ways to do this.”
According to Rozas, the irony of Equitas/Ujjivan and Compartamos/SKS’ differing approach is that the former two were founded from the beginning as commercial entities with a social mission. “Compartamos and SKS, on the other hand, began as NGOs and transformed into commercial entities afterwards. And in some sense, it actually created both complexities in the IPO itself – both had large amounts of shareholdings held by the original NGO, and in both cases, the oversight of that NGO and where that money went is really unclear.” The IPOs generated hundreds of millions of dollars which went back to the original NGOs and their founders, he said, and it’s not clear what they’ve done with it.

Rozas and Kanze agreed that the impact of the Compartamos/SKS IPOs continues to shape the industry’s approach to public investment – indeed, as Kanze pointed out, the Andhra Pradesh crisis led to the new regulatory framework and credit bureau infrastructure in India that made the Equitas/Ujjivan IPOs possible. But Kanze warned against complacency: “I would caution against relying too much on regulations and credit bureaus. High growth is happening again in India in certain pockets, and I’m sure these IPOs and the positive reaction will probably lead to more IPOs. So it’s important to be vigilant and to continue the focus on the social mission.”

James Militzer is the senior editor of NextBillion.
Photo: The Mumbai Stock Exchange. Credit: Nicolas Mirguet, via Flickr.



financial inclusion, impact investing, lending, microfinance, regulations