Microloan lenders can serve both investors and the poor: Mary Ellen

There are changes underfoot in India’s microfinance sector which has grown at an average annual rate of 80% over the last three years. Traditionally, microfinance institutions (MFIs) financed their lending through donations or deposits from borrowers but an increasingly popular option is private equity funding. MFIs accounted for about 40% of all private equity deals in the last two years, according to Venture Intelligence.

This trend is likely to continue. SKS Microfinance’s $354 million IPO also spotlights the commercialisation of India’s microfinance sector. Critics fear that the IPO will encourage India’s largest microfinance lender to put shareholders above the poor it serves, but others say tapping capital markets is a legitimate way to get funding.

Mary Ellen Iskenderian, president and CEO of Women’s World Banking, one of the largest networks of microfinance institutions and banks worldwide, talks to DNA in New York about how it is possible to serve both bottom lines simultaneously, reaping both financial and societal rewards. Excerpts:

SKS Microfinance is not the first microlender to go public — there has long been debate over whether social enterprises should be turned into giant commercial operations. What do you think?
I think there should be many, many more MFIs that take advantage of the debt and equity capital markets in order to grow their business. The truth is that even with the amazing publicity that microfinance has gotten there are still only 150 million borrowers worldwide. In India there is still a huge demand for credit, with some 120 million homes with no access to financial services. The sector needs to scale and I support a MFI’s decision to go to market in order to grow. But I do have concerns.

How do MFIs that have more of a commercial focus make their profits? Are the interest rates fair or are they dramatically higher than a bank loan?
What I worry about also is that the Reserve Bank of India (RBI) is very careful about the perception that a MFI may be making money from the poor so they will see backers of SKS like venture fund Sequoia Capital making windfall profits and start to limit some of the things that have made the Indian microfinance sector such a success.

It was only when banks were allowed to use their priority sector lending requirements by lending to MFIs that you saw the sector take off. We have heard the RBI is looking at whether or not those should be maintained. If the SKS IPO is too flashy a success then the RBI might overreact, may swing too far in the direction of clamping down on the rest of the sector.

Do you believe that entities providing microfinance need to transform into regulated financial institutions in India?
The industry in India has been built on the back of extraordinary NGOs but I think the transformation to a regulated entity — the
additional capital that it requires and the additional oversight through a regulatory body — allows MFIs to expand rapidly to reach more people. It tends to make financial reporting and interaction with clients transparent, and results in better governance. On the whole, we think that MFIs that transform are able to deepen their mission if they stay focused and seek like-minded investors.

At the outset, microfinance was practiced mostly by nonprofits. Why are banks and for-profits suddenly getting in the game?
I believe there is a place in the market for a dedicated microfinance sector rather than a banking sector that moves towards serving poorer clients. Our experience
with banks is that their understanding of risk and collateral needs pretty much rules out their ability to go really down market. But if MFIs are able to expand their capacity and move slightly upmarket you would cover the “missing middle” —those people/ companies which need larger loans than what is available in India.

The Indian microfinance loan on average is $200 but some companies have larger needs although they still want loans that are smaller than what a bank is comfortable providing. I don’t think the only answer to meeting the needs of the unbanked is the formal banking sector. There is an appropriate place for a well regulated, well structured microfinance sector.

Are there any downsides to banks entering this market?
I am not opposed to the banks entering the market but in many countries their risk, operational costs and operating structures just don’t allow them to move downmarket to the population served by microfinance. In India it seems pretty clear that the RBI is not going to allow MFIs to mobilise savings deposits and we at Women’s World Banking are huge proponents of the ability of the poor to bank their savings in a safe way, in a safe place. Most of the poor in India have limited places to keep their money safely but regulators are still not allowing MFIs to step into that gap as they are in many other countries. So, there is room for banks in India to provide savings products for the poor.

In banning MFIs from seeking savings deposits isn’t the RBI acting on an impulse to protect the poor from being cheated by fly by night operators?
I think that is at the root of it. The RBI has always had a certain amount of wariness about non-banking financial companies (NBFCs), and is reluctant to allow MFIs to cross that fundamental divide between providing lending services to providing savings services. As far as I know, there are no plans to change that structure in India so the banks are the only option.

What is the importance of focusing on supplying loans to women?
The research is clear that as the microfinance sector becomes more commercial, there is a trend away from a focus on women clients. We don’t necessarily think this is inevitable — there are profitable MFIs in the world which have tailored their offering to women. It just takes a special focus.

Women’s repayment rate is a little better than men’s, but not dramatically different. Microfinance repayment rates over the last 20-30 years have always been in the high-90s. Even during the last 18 months of the financial crisis we have seen repayment rates of 96-97%.

The thing that we find with women, which is so central to why we are looking at microfinance as an opportunity to lift people out of poverty, is that women spend the revenue from their micro-enterprises on three things — education of their children, family healthcare and improving their housing. Women are focused on making sure those investments are made. Men spend their money on tobacco, alcohol and other consumption items.

Do you remember the moment you decided to change your life and walk away from Wall Street?
My undergraduate degree was in development economics so I always had that idea that I would get involved in development. But when I graduated from Yale School of Management I went to Lehman Brothers. The moment that you talk about happened when I was working on a transaction where a large manufacturing company had hired Lehman Brothers to find an acquisition partner. I clearly remember that the financial model we had built for the client hinged on how many people would be sacked.
I remember having that flash of recognition that I was working
18-hour days and if I was going to be putting that much of my
time and life into my work, then I wanted it to be much more resonant with my values.