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The financing of microfinance is especially appealing for international and investment banks, because they can use their status and deal-structuring creativity to bring microfinance institutions to new kinds of investors. The following will be discussed in this chapter: Service delivery vs. financing, in-house vs. partnerships, social responsibility positioning.
Summary of the Last Lecture New Technology Corporate Choices MODELS AND CORPORATE CHOICES Financiers • The financing of microfinance is especially appealing for international and investment banks, because they can use their status and deal-structuring creativity to bring microfinance institutions to new kinds of investors Financiers • Standard Chartered Bank, for example, has used its presence throughout Africa and Asia to develop a portfolio of $170 million across 13 countries financing 41 MFIs In many cases Standard Chartered places funds from international investors who need its assistance to convert dollar or euro loans into local currency Financiers • International investors have also been pouring money into microfinance; total international investment increased from $1 billion in 2004 to $5.4 billion in 2008 At first, only socially responsible investors were interested in inclusive finance, and deals were far too small for institutional investors Financiers • As more mainstream investors enter, however, they rely heavily on well-known investment banks for quality assurance This means that investment banks and venture funds have a unique marketmaking role to play in bridging between worlds Financiers • The strong reputation and international connections of Credit Suisse were surely an important factor in the stunning success of the Compartamos Banco IPO in 2007 Financiers • Shares of Compartamos Banco, a Mexican MFI previously little known to investors outside Latin America, was sold by Credit Suisse to American and European investors (among others) at the unprecedented share price for a microfinance institution of 13 times book value Financiers • Other high-profile deals included the Sequoia Capital India investment in SKS Microfinance and the Deutsche Bank’s Microcredit Development Fund Financiers • A decision to finance rather than deliver does not preclude later direct involvement It may even pave the way Annibale makes this point with respect to Citibank Partnerships • In this market segment, transaction timing and location matters—a lot But bricks and mortar are expensive, hence the search for cost-effective delivery channels Partnerships • Most of the partnerships we consider here cover the last mile by taking advantage of specialized delivery channels There are also partnerships that involve outsourcing of functions such as IT Partnerships • Direct providers, such as Banco Nordeste in Brazil, Bank Rakyat Indonesia, and Banco Pichincha, took advantage of physical branches constructed for other purposes—in the first two cases by government The existence of these branches brought down fixed costs to a level that produced an attractive business model in each case, without reliance on external partners Partnerships • Where this is lacking, providers look around to identify existing networks they can ride on In Brazil, this search led to the banking correspondent model, which is practicedby many institutions and enshrined in Brazilian regulations BancoBradesco partners with Correios Brasil, the postal system, which has outletsin every small town and village Partnerships • Post office employees handle payments transactions, accepting deposits and paying withdrawals on behalf of Banco Bradesco, for a fee The cost structure makes everyone happy, but success depends on well-structured agreements and careful training and monitoring of banking agents Partnerships • Corporations have found microfinance institutions to be especially important partners, because they know the clients so well and already have successful relationships with them MFIs may also be more willing to experiment in the interests of their clients than are profit-oriented companies Partnerships • For example, when Vodafone developed its first mobile phone banking pilot in Kenya, it partnered with the MFI Faulu Kenya to work with Faulu’s client base Faulu was prepared to enter into the MPesa pilot project even though immediate profitability was not assured Partnerships • American International Group (AIG), one of the first entrants into microinsurance, used MFIs as an entry strategy It launched its first products through what it called the partner-agent model for life insurance in Uganda Partnerships • The partner-agent model allowed AIG to reach the whole client base of an MFI at once MFIs entered such a partnership eagerly because they saw how financially devastating death in the family could be for clients in a country reeling from the AIDS crisis Partnerships • Other major insurers, such as Zurich, Swiss Re, and Munich Re, have established lines of microinsurance activities, working with a variety of partners Partnerships • Partnerships can involve an even broader range of institutions In another example, ANZ Bank partners with the United Nations Development Program in Fiji UNDP offers financial education programs that prepare client communities to use the banking services ANZ offers Partnerships • Partnerships can involve an even broader range of institutions In another example, ANZ Bank partners with the United Nations Development Program in Fiji UNDP offers financial education programs that prepare client communities to use the banking services ANZ offers Partnerships • In structuring such partnerships, it is essential to ensure that solid business principles prevail and that no line of a company’s business will depend on an ongoing subsidy for its success, though start-up subsidies often help reduce the risk of experimentation Partnerships • Long-run subsidy dependence usually dooms projects to small scale—or ultimate failure This issue is closely connected to the last element of corporate choice we consider here: social responsibility positioning Summary • In house vs partnerships ...MODELS AND CORPORATE CHOICES Financiers • The financing of microfinance is especially appealing for international and investment banks, because they can use their status and deal-structuring... low-income people worthy clients In-House • One solution to this problem is the service company model Banco Pichincha, the largest Ecuadorian bank; Sogebank, the largest Haitian bank; and Banco... investment banking—bond issues for Compartamos Banco in Mexico and Mibanco in Peru, and securitization for BRAC in Bangladesh Financiers • After several years of participation at the investment banking