European Microfinance Week 2015

PRESENTATIONS AND DISCUSSION

Sachin S VANKALAS welcomed the audience and started the session by introducing the speakers and providing an overview of the major trends related to MIVs, based on Symbiotics’ 2015 MIV survey. As of December 2014, there are approximately 110 MIVs operating in five different continents with total assets adding up to USD 10 billion. MIVs represent 10-15 percent of the total microfinance marketplace. Growth in 2014 was lower than in 2013 but all MIVs still recorded a steady growth of 13 percent in total assets and 16 percent in microfinance portfolio. Furthermore, consolidation is taking place among MIVs - In 2014, 9 new MIVs were created and 12 ceased activities either because they matured/wound-down (9 out of 12) or because they were incorporated into another entity. Finally, MIVs are diversifying their portfolio towards Microfinance Plus (MF+) microfinance products related to specific themes, such as climate change, housing or education have come to represent around seven percent of MIV assets. There is clearly growth, but also some limitations, when compared to previous years. This leads to the question how MIVs can remain relevant to the market with competition from local banks and lenders in the market.

The panellists were then asked to introduce themselves and to react to the Symbiotics study. Maria Teresa ZAPPIA noted that BlueOrchard is an impact investor with a total of USD 1.5 billion under management. BlueOrchard recently rebranded their organisation from a microfinance investor to an impact investor, as they are now also investing in other topics such as education and climate insurance, besides traditional microfinance. Zappia challenged the statement that the market for MIVs is becoming saturated. She sees many opportunities in underserved markets.

Loïc DE CANNIÈRE from INCOFIN, started by claiming that MIV is an outdated term. He prefers the term private equity fund. INCOFIN manages around USD 700 million in assets. De Cannière then referred to the MIV survey, mentioning that the total of USD 10 billion consists of equity stakes as well as debt investments which provide a very confusing picture.

Christophe BOCHATAY represented Triple Jump which manages approximately USD 500 million, consisting of a wide variety of funds. In general, he sees a maturing sector with more competition from local banks and increasing consolidation. He noted that MFIs are raising more deposits and undergoing rapid change in the sector due to technological innovations.

Brad SWANSON of Developing World Markets, a US-based fund manager with both debt and equity funds under management, noted that the sector should indeed “work itself out of a job”, meaning that local banks should take over as they are better equipped to take on the task. He sees, however, that there remains a demand in the South for private equity as it still not sufficiently available from local sources. He hopes that in the future local actors will also take up this task.

Vankalas then continued by asking the panel whether they are mostly investing in tier 1 MFIs. How can you remain relevant in this reality when the large, mature, tier 1, well established MFIs have multiple possibilities of financing available at their hand and are in a position to select which MIV to use? De Cannière responded that there are still many products in developing markets lacking sophistication, referring to India as an example of a matured market with a lot of standardised products. INCOFIN aims to deepen the services provided by their investees and supported Swanson’s statement that equity is a good way to do so. Swanson added that Developing World Markets sees equity finance as a stage in development, just like microfinance. When Developing World Markets invests in an MFI, the organisation prefers to exit by selling to banks. In the past 18 months, his organisation sold three MFIs to banks, of which one was a bank in the South. According to Swanson, the biggest challenge to bring an MFI to a point where an MIV can exit is not on the operation side but on the governance. Governance systems need to be ready to accommodate growth towards the formal sector.

Vankalas changed subject by asking the panel how MIVs tackle the currency devaluation issue which has caused substantial defaults in several markets. Zappia replied that there is a lot to be done in the provision of local currency and that even existing hedging options are far from optimal. In addition, in some markets the provision of unhedged local currency (e.g. Vietnam) is a must but this brings significant currency risks in fund portfolios and can only be a choice in a limited number of markets and for very small exposures. De Cannière added that imbalances occur in currencies market. He mentioned that INCOFIN is no longer in the African market because it cannot provide competitive interest rates compared to local banks. He promoted MIVs to push for savings instead, because that is still an area where they can add value to local markets. 

Vankalas then turned the subject to regulation by governments and central banks and key issues such as introduction of interest rate caps in several developed markets. De Cannière is taking this more into consideration than before and sometimes chooses not to invest. Zappia agreed with him and finds regulation a very challenging topic as she observed that many defaults in microfinance are related to regulations and political interventions. 

After Swanson mentioned the importance of standardisation of social performance in the US market, Vankalas asked Bochatay to give his opinion on social performance reporting within the MIV sector. He answered that while the microfinance sector has a long tradition, MIVs lag behind on social reporting and stressed that harmonizing standards for measuring social performance is crucial. The panel agreed that expectations are too high regarding social performance measurement by MIVs. De Cannière added that MIVs should aim for SMART impact and outcome indicators and restrict the total amount of indicators. In line with social performance the panel agreed that more focus is needed on thematic funding to diversify portfolios and to have clearer social performance outputs. Moreover, MIVs should aim to identify successful tier 2/3 MFIs in rural areas which can support their double bottom line approach. However, the panel agreed that tier 2/3 MFIs cannot be their core business. 

A participant in the audience asked the panel for their opinion and experiences on diversified activities. Zappia responded that many MFIs are already investing in other services, such as housing or education, but often not in a proactive manner. The opportunity is to see how MIVs could facilitate the formalisation of such products. De Cannière added that rural finance products can also be very interesting. Swanson mentioned that potential to diversify product portfolios also depends on the structure of the MFI. 

The audience finally asked if MIVs include producers from immature markets in their portfolio. De Cannière responded that INCOFIN started a fair-trade fund and he was amazed that MFIs often do not focus on farmers and producer organisations. Zappia agreed but also pointed out the risks of rural finance products and options to reduce these risks by having a broad and diversified portfolio.