Rob Katz

Guest Blogger: Cracking the Capital Markets for Microfinance

James DaileyGuest blogger James Dailey worked at Grameen Foundation’s Technology Center for five years and lead the development of the Microfinance Open Source project. He also teaches Microfinance at the University of Washington. He is a founding member and CTO of MicroFinance ClearingHouse.
By James Dailey

The grande Waldorf Astoria Starlight Room in in mid-town Manhattan was above its capacity of 300 with participants at the second annual “Microfinance: Cracking the Capital Markets” conference. Based on the attendance and presentations of major banks and investment houses (Citi, Deutsche Bank, Credit Suisse, JP Morgan, etc), the capital markets are listening. This is an industry, or a sector of the financial industry depending on who you talk to, that is more often associated with charity and Nobel Peace Prize winner Mohammed Yunus and Grameen Bank, than with structured finance deals. Maria Otero, President and CEO of Accion International, which co-hosted the event with Credit Suisse, commented that even five years ago she could not have imagined being surrounded by the likes of these banks in front of the financial media press. That coincidentally, is how long I have been in the microfinance field, and I was also struck by how many new faces and new ventures I saw at this conference.Microfinance, loans to the poor and often uncollateralized, has grown tremendously in recent years, and there is a danger that it could become more grist for those looking for the downside to globalization. On this point, several prominent social responsibility funds were represented, including Klaus Tischhauser of responsAbility Fund, Switzerland and Scott Budde of TIAA-CREF, both of whom took pains to stress the importance of double-bottom line accounting and measuring progress out of poverty, to ensure that the social returns continue to be valued even as the transaction sizes get larger. responsAbility has funds of $96 MM (million) invested and TIAA CREF has placed $43 MM (with ProFund) of $100 MM fund, are by no means the only or the largest investor funds.

Elizabeth Littlefield, CEO of CGAP (Consultative Group to Assist the Poorest, a part of the World Bank) was one of several people who, with experience in both Wall Street and Microfinance, admonished the assemblage to help put the structures in place now and for the future, to ensure that financial services to all those left out continued to guide the efforts. Bob Annibale, Citigroup’s Global Director of Microfinance, and one of the most outspoken bankers on this subject, remarked that there remains a need for credit enhancements, access to ratings, and currency hedging.

Other key themes that emerged were around crowding out and risk profile non-correlation with existing markets and asset classes. “Crowding out” was the notion that the many players were chasing after too few opportunities and as the Economist pointed out in a recent article, the international financing institutions (e.g. World Bank, IADB) need to focus their public funds on more emerging microfinance efforts, rather than the more mature microfinance institutions (MFIs). Statistical evidence was presented by a young turk out of New York University that microfinance is non-correlative to risks experienced by commercial banks in developing countries, confirming what many of us in the sector have known intuitively, that the poor are the least integrated with global financial structures, at least for now.

Specific deals and structures were discussed, including the ground breaking securitization of the Brac portfolio in Bangladesh, a placement in local currency capital markets negotiated by a major bank. There was a definite buzz in the hallways as the likes of Omidyar Network and Google Foundation, the “new philanthropy” rubbed shoulders with Fund managers, Bankers, and a few microfinance organizations. ASA of Bangladesh announced a major new initiative to replicate its operations globally, to help reach this goal of 500 million households reached with financial services. Jean-Phillipe of Blue Orchard, speaking of the many deals that have brokered, commented on the fact that he could arrange liquidity of $100M but could not find places to put that level of funds.

Asad Mahmood of Deutchebank and Robert Weissenstein of Credit Suisse both added a level of passion, articulation, even exhortation, for why people in the financial sector should care about this sector, giving both insight on what is needed and how to move it forward. I really enjoyed Asad’s remarks, which touched on the theme that financial inclusion is important, and even significant as one looks back on a life’s work in finance. With Maria Otero, they were in agreement that some form of consolidation of the smallest organizations in the sector is likely. I remember hearing Asad talk at the Microcredit Summit a few years ago and his message continues to resonate: – to paraphrase – think of the waste of human potential that is occuring around the world, which is an untapped capitalist opportunity and a moral tragedy, both.

I know that such conferences are not easy to put on, so thanks of the sector should go to Robin Ratcliffe and the many Accion staff and volunteers involved.

I tapped into a new energy at this conference, an optimism that a growing number of people at the highest levels of finance and policy are recognizing that a world in which the poor are left out systematically and endemnically, is neither morally acceptable nor pragmatically sustainable.