Responsible Equity Exits: Lessons From Cambodia

FinDev Gateway, 13 March 2024

Back in 2019, the music mega-star Taylor Swift learned that the master recordings of her first six albums had been sold for $300m to an investor whom Swift regarded as an “incessant, manipulative bully” that put his own interests ahead of the artist whose work he now owned. This was a classic case of an irresponsible exit. The seller – Swift’s old manager, who had played an important part in building up her stardom during the first decade of her career – chose to maximize returns, paying no heed to whether the buyer was a reasonable fit.

Now, imagine a similar scenario in the financial inclusion sector:

Consider an NGO that spent decades incubating a strong social mission in a financial institution serving poor clients, ending its involvement by selling all of its shares to an investor focused entirely on maximizing profits. Following the purchase, the buyer steers the institution away from its poorest clients, refocusing entirely on profits and dispensing with the niceties of impact measurement or even basic client protection.

That’s an extract from the recent joint publication by CERISE+SPTF and e-MFP which I co-authored, Rethinking Responsible Equity Exits. And it happens to be particularly appropriate to Cambodia.

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Preparing for the Long Tail of COVID’s Impact on Microfinance

Center for Financial Inclusion, Jan 7, 2021

In 2010, when the world was going through the largest economic crisis in three generations, the microfinance sector found – in most cases for the first time – that it’s not immune. The sector’s many stakeholders, very few of whom had previously experienced a major crisis, had to learn on the fly. Seeing this knowledge gap – and also recognizing an opportunity – CFI launched Weathering the Storm, a first-of-a-kind research project to capture the experience of MFIs dealing with crisis.

With the onset of COVID-19 came a scramble for direction on how to respond, and, amid the hubbub, the first Weathering the Storm made the rounds on social media as one of the reference materials for this new crisis. Many of its lessons — admonition to MFIs to “keep leverage low and liquidity high,” focus on prioritizing client and staff confidence, emphasis on maintaining transparency with creditors — proved as true in April 2020 as they did a decade ago. Indeed, its discussion of creditor responsibilities helped inform the rapid and well-organized response by social investors.

Even so, it wasn’t a perfect fit. Much of the original Weathering the Storm focused on institutions whose crises were due more to internal mismanagement than to external threats — a situation that is largely reversed today. And most of that study focused on avoiding a crisis rather than surviving one – hardly appropriate advice to institutions facing a pandemic. Recognizing these differences, CFI — this time in partnership with e-MFP — launched Weathering the Storm II to seek out cases that are more relevant to today’s situation.

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How long can microfinance institutions last the liquidity crunch? An analysis of the data

covid-finclusion, Apr 28, 2020

Liquidity has been foremost on the minds of just about everyone in the financial inclusion sector. Several essays on this site have delved into the topic. The first article in our liquidity series outlined three drivers for illiquidity: deposit withdrawals, operating costs, and maturing debt, and argues that maturing debt presents the greatest risk. But what does the data say? Here we will dig into that, and investigate just how severe the different elements of the liquidity crunch are to different categories of MFI around the world.

We don’t have access to sector-wide data reflecting the situation right now. Nobody does. But we can get a good view of what may be happening from historical data collected by MIX Market over many years. Let’s start with the most basic question. Assume an MFI is operating under complete shutdown, with no repayments, no new disbursements, and no other inflow or outflow of funds – it’s operating entirely from cash reserves. How many months would it be able to survive before the money runs out?

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Part 2: Keeping the Blood Flowing: Managing Liquidity When Clients Need Deposits

covid-finclusion, Apr 20, 2020

In our first piece in this series – Keeping the Patient Alive – Adapting Crisis Rubrics for a Covid World, we introduced the analogy of the emergency room doctors trying to treat a critically ill patient – a financial services provider (FSP), its staff and clients in lockdown or socially distancing, unable to travel and with incomes collapsing, health expenditures increasing, and some sick or dying. Repayments are close to impossible, and new loan applications are flat. But operational expenses continue, and it’s a race against the clock.

In short, this patient is critical. To continue the analogy, ensuring the reciprocal trust and confidence of staff and clients and investors is like treating a patient’s organs, with interventions from pharmacology to surgery to transplant. We’ll get to that, though. For now, the challenges need triage. The patient can’t breathe, so she cannot oxygenate and circulate her blood. This, to come back to our institution, is the critical need for liquidity.

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Part 1: Keeping the Patient Alive: Adapting Crisis Rubrics for a COVID World

covid-finclusion, Apr 14, 2020

In 2010, the Centre for Financial Inclusion (CFI) published a paper by Daniel Rozas called Weathering the Storm, reviewing 10 MFIs that faced existential crisis, some having survived and others not. The paper was written in the aftermath of the 2007-08 global financial crisis and its subsequent ripples across many microfinance markets.

Today the sector is facing a crisis both broader and deeper than anything that’s come before. It is not alarmist to say that the threat – to clients, their business, financial service providers and the whole ecosystem that supports them – is existential.

In recent weeks, there has been a cacophony of responses as different stakeholders try to get a grip on what’s happening and what comes next. We’re mindful not to add to the noise without adding value. The value, we think, is in extracting just the applicable lessons from previous crises, matching them to the complex array of challenges being faced today, and doing so within the framework of an illustrated guide that takes that CFI paper as its starting point. So to this end, the European Microfinance Platform (e-MFP), CFI and the Social Performance Task Force (SPTF) are launching a collaborative blog series that will try to help practitioners, investors and other stakeholders weather this storm.

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Liquidity Before Solvency: A Guide for Microfinance Investors in the Time of COVID-19

next billion, 14 April 2020

The COVID-19 pandemic has generated a real sense of crisis in inclusive finance, surpassing even the reaction to the 2008 financial crash a decade ago. And particularly among investors, the topic of highest concern is the looming crisis in liquidity for financial institutions.

For microfinance institutions (MFIs) in many countries, the combined effects of the pandemic and its economic impact will lead to high levels of non-performing loans (NPLs), as clients struggle to make their scheduled payments. During past crises, the typical impact on MFIs has been a period of retrenchment. Much of this is likely to be repeated: With slowing trade and economic activity, fewer loans will be made and portfolios will shrink. The combined effect of credit losses from the NPLs and a shrinking portfolio will put serious pressure on equity capital, quite possibly threatening MFIs with outright insolvency, and ultimately, losses to investors.

But a financial institution can simultaneously be insolvent and still liquid, and in a crisis, preserving MFIs’ liquidity must take precedence over maintaining their solvency. To understand why, it’s important to explore the two concepts, and how they’re likely to impact MFIs and their investors as the current crisis progresses.

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Boycott Myanmar: An Open Letter to the Microfinance Community

next billion, 4 December 2018

To remain silent and indifferent is the greatest sin of all.

– Elie Wiesel

Over recent months, I have been engaged in multiple events and conversations on expanding financial inclusion for refugees. I’m impressed by how quickly the sector has ramped up to focus attention on this topic, and encouraged by the level of interest it’s been generating among donors, investors and providers.

But all this attention has forced me to confront a topic that’s been troubling me for some time. The attention on refugees includes a focus on the plight of the Rohingya, the Muslim minority from Rakhine State in Myanmar, and the world’s latest victims of genocide. Hundreds of thousands of Rohingya have fled to neighboring Bangladesh, where they’ve been supported by the usual agencies and NGOs that work with refugees, as well as by BRAC – one of the world’s leading microfinance institutions. This is important and laudable work.

And yet, throughout these conversations, I haven’t heard anyone from the microfinance sector mention the source of the Rohingya’s misery – the unspeakable atrocities taking place in their villages in Myanmar. Perhaps that’s not an accident. That discussion is too painful.

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Using Findex Wisely: Understanding the Strengths and Weaknesses of the World’s Biggest Financial Inclusion Dataset

next billion, 18 June 2018

The publication of the 2017 Global Findex has generated much reflection on the state of financial inclusion – and plenty of analysis of the data, looking for the buried treasure of some new trend or pattern. This yields important insights. The Financial Inclusion Hype vs. Reality report by the Center for Financial Inclusion (CFI) is particularly worth reading for its in-depth and honest reflection of what Findex tells us.

But when using Findex, there are important things to keep in mind. First, while the overall figures and trends are important, the numbers for any one country should be treated with caution. This is not because we mistrust the Findex team or their work. It’s simply the result of what Findex is – a set of surveys based on randomly selected (hopefully representative) population samples of more than 150,000 adults in over 140 economies. And surveys can – and often do – go wrong, particularly when they deal with difficult or personal subjects (like finance) or are conducted in countries undergoing political and economic turmoil. more ->

Caveat Venditor: A New Model for Buyer Selection in Responsible Microfinance Equity Exits

next billion, 2 May 2018 (with Sam Mendelson)

For most, socially responsible investing means just that – investing in a manner that not only generates financial returns but also produces positive social value. But what does it mean for an investor to be “responsible” when selling their holdings? How does one stay responsible at the very moment when one ceases to be an investor?

This is a basic challenge facing investors seeking to “exit,” i.e. sell their equity stakes to a new buyer. The issue isn’t entirely new. It first emerged in the mid-2010s, when several microfinance investment vehicles (MIVs) were starting to reach the end of their 10-year terms and were seeking to divest their assets. This issue was first addressed in the financial inclusion sector by a 2014 papercommissioned by CGAP and CFI, which first defined many of the key questions that socially responsible investors need to address when selling their equity stakes.

With another four years of multiple exits under the sector’s belt, NpM, Netherlands Platform for Inclusive Finance, along with the Financial Inclusion Equity Council (FIEC) and the European Microfinance Platform (e-MFP) asked us to take a closer look at one particularly tricky part of the exit process – selecting a buyer that is suitable for the microfinance institution (MFI), its staff and ultimately its clients. The result is Caveat Venditor: Towards a Conceptual Framework for Buyer Selection in Responsible Microfinance Exits – a new paper that goes beyond raising questions, and seeks to provide a template to help investors navigate the complex terrain of “responsible exits.” More –>

‘Like Using a Wall to Stop a Runaway Bus’: Cambodian Microcredit is Overheated, But Rate Caps Aren’t the Answer

next billion, 10 May 2017

There is nothing so convenient as arguing against a straw man. You dress it up in whatever way you want, then tear it down, feeling great about the accomplishment.

That’s what Milford Bateman does in his recent NextBillion article, “Don’t Fear the Rate Cap: Why Cambodia’s Microcredit Regulations Aren’t Such a Bad Thing.” He starts with the rather startling – and entirely unsupported – assertion that the rate cap announced in Cambodia is an effort to “to avert an otherwise inevitable and destructive meltdown.” He then proceeds to raise an entire army of strawmen in the form of arguments I apparently made in my article in the Phnom Penh Post, none of which are there.

Did I “steer blame away from those responsible for the current crisis in Cambodia”? Where did I write that “the supply of microcredit will completely dry up as a result of government intervention”? Did I write “if the microcredit sector is constrained in some way or its growth halted, the poor will flock to the local money-lender to satisfy their huge thirst for microcredit”?

It may work in today’s political environment, but for a credentialed academic, such license with truth and facts is simply not acceptable. The trouble is that this approach pervades the entire article.

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