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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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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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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Preventing client over-indebtedness in Cambodia

e-MFP, 20 October 2016

This week marks Financial Inclusion Week. In support of this effort to highlight what Financial Inclusion means for the Platform, e-MFP would like to highlight the work being done in Cambodia by its members and partners, including ADA, BIO, FMO, Incofin, and Proparco, as well as by the MIMOSA Project.

From its beginnings as a hotbed of NGO activity to one of the world’s most active microfinance markets today, Cambodia has always traced its own path in the sector. A decade ago, access to finance in Cambodia was minimal. Today, the Cambodia Microfinance Association counts 2 million loans outstanding for a population of 15 million, along with a growing number of deposit accounts, remittances, and other financial products. The Symbiotics MIV 2016 survey reports Cambodia receiving nearly 10% of microfinance investments in the world, second only to India – a country whose population is nearly 100 times larger.

What happens in Cambodia affects across the entire microfinance sector. And on that front, Cambodia is once again tracing its own path. more →

Opportunity International and MyBucks: The Future of Digital Microfinance?

nextBillion, 21 June 2016

Co-authored with Gabriela Erice Garcia, e-MFP

Back in November 2015, a press release briefly made the rounds, announcing that “Opportunity, Inc. . . . has entered into a share purchase agreement to sell six banks serving sub-Saharan Africa to the MyBucks Group, a Luxembourg-based financial technology (fintech) company.” This generated some comments on LinkedIn and a blog by consultant Hannah Siedek, who recognized how unusual a deal this was and wondered if she should consider it “a good (or not so good) operation.” But aside from this, reaction has been surprisingly muted.

By all accounts, this should have been bigger news for the microfinance sector. One of the major microfinance networks selling six subsidiaries to a fintech startup, and doing so in sub-Saharan Africa – the global hub of innovation in mobile banking. At a time when technology and mobile money are the talk of the sector, how does a story like this pass under the radar? more →

The biggest gap in Financial Inclusion? Metrics.

 e-MFP, 27 February 2015

The microfinance sector has been abuzz with the implications of the “final word” study on microcredit impact. For many, including myself, this has been an opportunity to consider a trend that’s been taking place for several years now – from microfinance to financial inclusion. In my last blog, I touched upon the subject of metrics that this new shift requires. I would like to delve deeper.

To use the definition of the Center for Financial Inclusion, “Financial inclusion means that a full suite of financial services is provided, with quality, to all who can use them, by a range of providers, to financially capable clients.”  That encompasses many things, but perhaps more intuitively, financial inclusion means providing serving those who aren’t being served – whether they are too poor, too informal, or too remote.

It’s a compelling goal. Yet the metrics we use to measure progress came from a time when microfinance meant making loans to the poor. They simply are not up to the task of measuring financial inclusion. more →

Microfinance is dead. Long live Microfinance!

e-MFP, 12 February 2015

The verdict is out. Final publication of six randomly-controlled studies (RCTs) has drawn a pretty thick line under the words of David Roodman: the average impact of microcredit on poverty is about zero. The notion that microfinance lifts the poor out of poverty is officially dead.

Now, the caveats. The studies evaluated microcredit only – not savings or payments or insurance. Nor did they cover so-called microfinance-plus programs, which provide training, health care or other interventions, along with credit. It’s quite possible that these or other specialized branches of microfinance practice do raise the living standards of the poor. But, if I may be so bold, even the best of these initiatives are probably less effective than we might have supposed.

This is good news. We in the microfinance community could use some humility. We’re financiers, not doctors, scientists, or teachers. To think that we can alter the lives of millions is hubris. more →

Are MFIs overstating their savings outreach?

e-MFP, 28 Oct 2013

Since the microfinance sector broadened its focus from loans to financial inclusion, savings have become a major focus.  And rightly so – the argument for providing poor customers with a safe and reliable place is backed by both robust research and common sense. Meanwhile, MFIs are already delivering on the promise: in 2011, MIX Market reported nearly 80 million depositors world-wide, with an average balance of $994.

It’s a great story. Unfortunately, it’s at least somewhat misleading. Simply put, when it comes to microsavings, objects in mirror may be larger than they appear.  More →